Retirement planning in Australia
How to prepare for retirement in Australia, including how to choose a super fund and grow your balance well before you retire.
The first step to prepare for retirement is to make sure you're in the right super fund. You want a fund with low fees and a history of high, long-term returns as well as an investment strategy you agree with.
Prepare for retirement with the right super fund
Quick tips: How to compare super funds
- Fees: Look for lower fees, as these will be paid over time out of your retirement nest egg.
- Investment choices: Look for a fund that has options to suit your needs and personal appetite for risk.
- Extra benefits. Does the fund offer any extra benefits like discounted insurance, free advice or membership offers?
- Performance. Look at how the fund has performed over the last 5-10+ years, and look for consistently good performance.
- Insurance. Many super funds offer some form of life insurance cover, but typically at extra cost. Weigh the costs and benefits.
For more information on this check out our details guide on how to compare super funds.
How to choose an investment strategy
When picking a superannuation investment strategy, some of the most important factors to consider are your age, your situation and your personal taste for risk.
- Age: Higher risk options are usually more suitable for younger people, while safer lower-risk options are often preferable for older people.
- In the longer run, higher risk super funds have more time to ride out the ups and downs of the market, and end higher.
- Older people, or anyone else who may be drawing super within a few years, may be at higher risk of losing funds to a single bad year at the wrong time.
- Your situation: If your retirement goals require a specific investment strategy, then it might be worth opting for a higher risk than you would normally take for a shot at it. Similarly, if you know you'll need at least a certain amount then a low risk strategy could be a much more dependable option.
- Consider how much you'll need for retirement. If a low or no risk strategy can help you achieve it comfortably you might want to consider playing it safe.
- If you'll be withdrawing your super in the near future, lower risk investments are substantially safer.
- Your taste for risk: This is important because an investment strategy that works for you is one that you are comfortable with. You'll usually be in it for the long run, so avoid a strategy that keeps you lying awake at night.
Planning your income in retirement
Superannuation is just one of your post-retirement income sources. Knowing about and planning for all the other ones that may apply can help you balance the budget. After retirement you may still earn income from sources like:
- Age pensions
- Home equity releases
- Selling off assets like the family home
- Working part-time
- Investments outside of super
Once you know how much you will need for retirement, you can look at these expenses next to your sources of income. In addition to this, there are several ways to manage your superannuation income to make it work for you.
Upon retirement, you are able to get paid the total amount you have saved in your superannuation fund, and can divide that amount into specific types of payments. Depending on your situation, you can use these options to make your retirement funds go further.
Superannuation income options when you retire
Lump sum: Get super paid out as a lump sum.
- You generally pay no taxes on lump sums withdrawals if you are aged 60 or over, and 22% if you are under your preservation age at the time of withdrawal. If you are between your preservation age and the age of 59, then the first $195,000 is tax free and the remainder is taxed at 17%. By waiting longer to withdraw a lump sum you might be able to pay less tax, but will not have access to the funds as soon.
- Lump sum payments can be a good choice if you want to reinvest the money quickly.
- Beware of this option if you have poor spending control.
Regular income stream: Get paid from your super in regular instalments.
- Choose payments of almost any size and vary them as needed from year to year.
- Get regular smaller payments, and manage payment size for tax advantages.
- Save money day to day by being able to budget for a consistent income.
Purchase an annuity: Annuities can give you guaranteed income and other advantages for defined periods, but typically do not pay as much as other options.
You can combine the above options as desired to create an after-retirement financial plan that works for your needs. One of the main ways to save more money here is with the considerations around superannuation payouts, for example ensuring any lump sums fall short of the taxable threshold. Consulting a financial adviser ahead of time can be a valuable way of planning for retirement and making sure you've optimised your finances.
- Diversify your investments. If you will be dependent on your investments to support you in retirement, diversification is vital. Make sure you invest across a variety of options and never put all your eggs in one basket.
- Consider managed funds for property investment. Property investments can be potentially lucrative, but carry a high price tag that puts it out of reach of many people. Managed funds, which are where a professional manages your superannuation investments for you, can invest your money in real estate, even if you don't have enough to do so yourself.
- Don't underestimate savings accounts. Good old fashioned bank accounts are still one of the few ways to enjoy a guaranteed return on investment.
- Protect your assets. You'll largely be living off your assets after retirement and it's a good idea to make sure they're protected no matter what form they take. This might be anything from purchasing insurance for your property to getting sturdy waterproof bags for the stacks of cash under your mattress.
- Plan on living longer. Age 65 to 100 is a long time, almost enough to get you to middle age all over again. These days it can be prudent to plan on living for that long, or even longer, after retirement.
- Claim all the benefits you can. In addition to age pensions, you may be eligible for other assistance. Set pride aside and make sure you are claiming as much as you can.
- Remember your goals. Your retirement goal is probably to save as much money as you can ahead of time. Keep this in mind, and remember to look at the actual over-time value of investments and expenditures.
- Plan a lifestyle. If your superannuation fund isn't on track to buy a private island by the time you're 65, you might need to reconsider your planned lifestyle. Plan a post-retirement lifestyle that works for you and your means.
- Stress-test your retirement plan. How robust is your retirement plan in the face of adversity? When you're budgeting it, consider adjusting some of the variables to see how well it can withstand changing circumstances.
- Start ASAP. The sooner you start working out your superannuation and retirement plans, the sooner you can really focus on saving. The last decade or so before retirement is a good time to make sure everything is in order, but everything before then is a good time to save as much as you can. Remember, money you put into your super fund usually grows over time. It might seem like it's disappearing at times, but in fact it's doing the exact opposite.
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