The Seven Deadly Sins of Retirement

If you are approaching the end of your working life and looking forward to retirement it is important to properly plan for the path ahead.  From underestimating how much you may need to not being proactive with your super, here are a few of the missteps to avoid.

1.  Not Having a Plan

The most fundamental mistake is expecting your retirement to simply fall into place.  Like any major life transition, a successful retirement requires forethought and a robust plan.

Ask yourself what you want out of your retirement years.  Many take to travelling and pursuing long-neglected hobbies, while others are content to lead quiet lives devoting attention to their homes and families.

What you decide will then inform the resources you will need to fund your priorities in retirement.  If there is a gap between your retirement savings and what you need, then you can start to consider ways to make up the shortfall.

Doing so might involve topping up your super in the years leading up to retirement, cutting back on spending to boost your savings or to pay down a debt, or considering a move to ‘downsize’ your property in retirement to free up capital for investment.

2.  Underestimating Inflation

Confident as you might be about your retirement plan, it won’t succeed in the long term without factoring in and combating inflation.  Say you plan to live on $4,000 a month in retirement.  That might be comfortable enough to meet your needs in the early years, but fast forward 10 or 15 years and that same amount may not make ends meet.

To combat the effects of inflation it is important to consider investing a portion of your retirement savings, particularly funds you do not expect to need to access in the short term, in assets that can grow in value and outpace inflation over the long term.  Such investments are typically a trade-off in accepting short-term volatility for the potential of better long-term returns, and so should be entered into with due care, consideration, and diversification.

3.  Underestimating How Long You Will Live

One of the most consequential variables in retirement planning is how long to plan for.  While many rely on average life expectancy statistics for guidance, we should remember these are neither static – they can increase over time as living standards improve – nor predictions.

To put it another way: don’t assume that you will only need to fund 20 years of retirement.  If you plan only for a retirement that lasts to age 85, what then if you live into your 90s or beyond?

To help to combat longevity risk you should seek to establish a structure of finances that sustainably generates income, ideally with a modest and gradual drawdown of capital.

4.  Getting The Timing Wrong

The timing of retirement isn’t always up to us.  Some people continue working out of necessity – whether to boost their super, clear debts, or ride out a down market – while others are pushed into an early retirement because of illness or redundancy.

But then there are those who put off retirement out of uncertainty.  They might not feel they have not accumulated the savings they need and insist on working longer. Or, there might be some mistaken beliefs at play.

One misconception that is unfortunately common is that you can only retire once you reach pension age.  But in truth, there is no such age limit.  Don’t let a misunderstanding of the rules or uncertainty of your position cost you valuable time in your golden years of retirement.

5.  Leaving Your Super in Accumulation Phase

When you meet a superannuation ‘condition of release’, such as retiring after age 60 or reaching age 65, there are two main ways you can receive your super: commencing an account-based pension or withdrawing it as a lump sum.  Some people, however, leave their super in ‘accumulation’ phase despite ticking all the boxes necessary to access it.

What they may not realise is this unnecessarily costs them tax on the earnings of their super.  Any investment earnings in the accumulation phase of superannuation continues to be taxed at a maximum rate of 15%, unlike an account-based pension where investment earnings are generally tax-free.  In other words, you could give up a key tax advantage without realising it.

6.  Not Taking Advantage of Your Entitlements

For those who qualify, the Age Pension can be a valuable supplement to your income, but it is not something you can then set and forget.  Your eligibility and the amount you receive depend on your income and assets, and these positions of course change over time.

It is important to keep in mind that Centrelink does not automatically depreciate lifestyle assets like cars, boats or caravans.  If you don’t update their recorded value, you may over time start to receive less Age Pension than you are entitled to.

Centrelink also do not receive any direct update on the balance of cash at bank.  Regularly updating Centrelink’s records of your finances can result in a material increase in your eligible rate of pension payments.  This can assist to support the longevity of your retirement savings by mitigating the requirement to draw down capital.

If you do not qualify for the Age Pension it is important to assess your eligibility for concession cards, such as the Commonwealth Seniors Health Card and Low Income Health Care Card, which can provide material reductions to general living expenses and medical expenses.

7.  Being Too Frugal

A surprising number of retirees pass away with a large portion of savings untouched.  This may be intentional, resulting from a desire to leave a large inheritance.  However, it may also be a symptom of an inability to shake the sense of scarcity that is often felt throughout working life. 

While spending within your means is admirable, you don’t want to overdo it and deprive yourself of the things that make retirement worthwhile.  Think about raising this discussion with your financial adviser and working with them to create a plan that occupies a sensible middle ground between over- and under-spending.

If you would like to discuss your retirement plan, please contact our office to arrange a time to meet with one of our qualified financial advisers.