How to plan for your retirement goals
Your golden years are the time to kick back and start doing all the things you’ve wanted to do, and stop doing the things you don’t. Unfortunately, thanks to bad luck or poor planning, not everyone is able to ease into retirement by the age of 65.
The main key to retiring in style is leveraging your superannuation fund. This guide explains how to devise a superannuation strategy that works for you and how to plan for further income in old age, and gives you tips for pulling it all together.
In all cases your first step should generally be to consolidate your super into a single fund, unless you’re deliberately keeping them separate. This means choosing the right type of super fund and knowing about the available options. If you already have your super fund sorted out and are crystal clear on all the details, then you might want to jump ahead to planning your income in retirement. Otherwise, start at the beginning.
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Once you’ve established your long-term superannuation fund you can start growing your investments. Before doing so, it can be worth making sure you’ve chosen the right option.
- MySuper is the default option. When not otherwise specified, you will have this type of super fund. As of July 2017, any existing default funds will have been rolled over to MySuper accounts.
- MySuper, SMSF and retail super funds are available to everyone.
- Industry funds and corporate funds are not necessarily available to everyone.
The table below gives an overview of the different options. Note that these options are not all mutually exclusive. For example, you might get a MySuper through an industry fund, or your employer might not offer any kind of corporate super fund.
|Defining features||Pros||Cons||Who is it good for?|
|MySuper||The default fund. Simple and effective||Simple and cost-effective features, fewer and lower fees, effective investments||Other funds may be preferable for you||Everyone|
|Self-managed super fund (SMSF)||Assume full control of your own super fund and investments||Potentially greater returns, a high level of flexibility and tailoring, can be held by up to four people||Greater risk, can be a lot of work, requires some financial and legal know-how, you are personally liable for all losses, does not include insurances||Experienced investors, people with very specific retirement plans, groups of 4 or fewer who want to share retirement plans|
|Retail fund||Commercial superannuation product sold to consumers||Many options, can offer substantial returns, some offer a MySuper option||Typically has higher costs and fees, the company retains a profit, can vary widely in many ways||People who have compared a specific retail fund to other options and found it to be preferable for them|
|Industry fund||Non-profit industry super fund, membership based||Can offer industry-specific benefits, mid to low cost, some offer a MySuper option||Fewer options than retail funds, higher costs than MySuper, some but not all are restricted to employees of certain industries||People who can benefit from the specific advantages of that fund or are in a relevant industry|
|Corporate fund||Employer superannuation for employees||Varies depending on the company and fund||Varies depending on the company and fund||Employees of that company|
How to pick a super fund
Here are some tips on how to choose a super fund type:
- If an SMSF doesn’t sound right for you then it’s probably safe to rule it out immediately.
- Consider using MySuper as a baseline against which to compare retail super funds, as well as industry or corporate funds.
- If you’ve compared other options and found nothing preferable to MySuper, then that’s probably the way to go.
How to compare super funds:
- Fees: Look for lower fees, as these will be paid over time out of your retirement nest egg. Specifically look for additional value to justify any fees and consider avoiding options that don’t deliver.
- Investment choices: Look for a fund that has options to suit your needs and personal appetite for risk.
- Extra benefits. Your employer is required by law to pay a certain proportion of your ordinary earnings into your super fund, but this base amount is only the core contribution. Some funds will have more than this, while others have additional ways you can make contributions.
- Performance. When comparing superannuation fund investment performance, look at how it’s done over the last five 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.
- Service and additional benefits. MySuper only offers core investment and retirement planning, but retail and other funds can provide varying additional benefits. Once again, consider these but be mindful of the cost.
An investment strategy is all about mixing up growth and defensive investments until you have a balance that works. Growth investments are the high risk ones such as real estate or shares that may considerably increase or decrease in value, while defensive investments are the low risk ones like cash and fixed interest accounts that generally won’t lose much value.
Superannuation investment strategies can be divided into four groups, representative of most of the options out there. Going with your personal taste for risk versus reward can work, but there are some other factors to consider, in particular:
- Higher risk options (growth and balanced) typically have better returns in the long run.
- You can, in the long run, expect higher risk options to actually lose money in the bad years. Typically they will make it back and then some in the good years.
- Some funds may also offer “high growth” options that invest 100% in shares and property.
- The default MySuper option is typically equivalent to a balanced strategy.
Note that these options do not apply to MySuper, which has its own special strategies explained further below.
|Type||Approximate investment mix||Typical expected return||Expect a loss|
|Growth||High risk, high return||85% shares and property, 15% cash or fixed interest||6.2%||4 or 5 years in 20|
|Balanced||Medium risk, medium return||70% shares and property, 30% cash and fixed interest||5.7%||4 years in 20|
|Conservative||Low risk, low return||30% shares and property, 70% cash or fixed interest||4.2%||0 years in 20|
|Cash||No risk, guaranteed returns||100% fixed interest with Australian institutions||2.9%||0 years in 20|
How to choose an investment strategy
When picking an 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.
MySuper investment strategies
MySuper has two straightforward investment options. The default, and the more popular of the two, is generally equivalent to a balanced investment strategy. You can find out more about the exact investment strategy and breakdown by checking with your super fund.
The second is the lifecycle investment strategy option, which automatically adjusts the risk levels based on your age. A typical lifecycle investment strategy mix might look like:
- 85% growth, 15% defensive investments up to age 45
- 75% growth, 25% defensive from age 45 to 55
- 55% growth, 45% defensive from age 55 to 65
- 40% growth, 60% defensive age 65+
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.
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.