FROM LAURENCE SMITH, FINANCIAL ADVISER, UEM WEALTH
Making the decision to plunge into retirement can be nerve-wracking. It’s a weird idea. After spending 40 years (or sometimes longer) working and earning money to support a life, to step away and need to draw your income from your own savings and investments or from a social security benefit might sound scary. Like all major decisions, there are risks, and there are ways to deal with those risks.
Here are some common concerns that I’ve heard from clients over the years.
1. Market risk. For many Australians, superannuation is the biggest asset they will own through their lives, with the exception of the family home. Most superannuation interests in retirement are held through assets that are to some degree linked to the markets. When there is volatility in share markets (in particular), retirees get nervous about whether they can afford to recover from a reduction in the value of their assets.
What you can do: Take a long-term view of your investments, diversify, and speak with a financial planner to make sure that your investments are appropriate to both your retirement goals and your investment attitudes.
2. Legislative risk. It takes a significant length of time to prepare for retirement. This requires looking at income and expenditure, finding surplus savings, allocating them to the right investments to grow and accumulate and, holding nerve through volatile market periods. Ultimately though, it takes placing a degree of trust in regulatory bodies to hold some in their rules. For example, superannuation is very tax effective. Using this vehicle as a long-term retirement investment means trusting that it will remain a tax effective vehicle when it’s time to retire.
What you can do: Stay aware of changes that are announced to the relevant tax and superannuation rules, and keep a flexible mindset, or use the services of a financial planner who will consider not just the regulations, but what actions should be taken to deal with them.
3. Longevity risk. Australians are living longer. The latest Intergenerational Report (published in 2023) notes that while average life expectancies in 2022-2023 are 81.3 for men and 85.2 for women, they are expected to increase by 2062-2063 to be 87 for men and 89.5 for women. This has huge implications for how to plan a retirement. More years lived in full health and more years lived in ill health, means money needs to last longer. It also presents an additional risk to planned legacy or inheritances.
What you can do: Consider what it costs (on average) to achieve a “comfortable” lifestyle and use this when planning out retirement finances, consider the use of lifetime income accounts that guarantee income while offsetting market risk, and consider using a financial adviser to assist in assessing the best strategy to help you achieve this.
4. Left field (unexpected) risks. Life will occasionally bowl you a googly. Despite your carefully laid plans, the unexpected – such as a medical event – could throw carefully laid retirement plans into turmoil. This could impact more than one household. For example, a retirement could be thrown off the rails if an adult child suffered a severe illness or accident and was left with no alternative but to move back into a retired parent’s home.
What you can do: Make sure your plans aren’t left too lean (allow for some “emergency” funds) and talk to children about important financial matters like savings and personal insurances. If you’re unsure how to go about thinking through some of these problems, a financial adviser is again well placed to assist. Consider including children in these conversations sooner rather than later.
These are just a few of the areas that need consideration when planning your retirement. There are others that will be of greater or lesser importance depending on personal preferences and circumstances (such as legacy preferences or future intergenerational wealth transfers).
One of the advantages of financial planning is to have a trained professional assist you in understanding not just each individual area of advice, but also how they fit together to help you achieve your goals. Regardless of where the starting point is, planning earlier will lead to more options, and a better overall outcome.
DISCLAIMER General Advice Warning – this is untailored, general advice. It does not take into account your personal circumstances. You need to decide whether it meets your needs. Laurence Smith is an Authorised Representative and UEM Wealth Pty Ltd is a Corporate Authorised Representative of Lifespan Financial Planning Pty Ltd (AFSL 229892). Laurence Smith may offer services through UEM Wealth and UEM Group. Accounting services are provided by UEM Group. Financial Services (financial product advice and dealing) are provided by UEM Wealth. To the extent permitted by law, although the same adviser may offer you services under the above business, each business is solely and separately responsible for the advice they each provide.
