Many of us worry about our lives beyond retirement - about whether we will have the money we need to live the kind of life we want. This can be even more difficult if retirement is still a long way away. We feel the pressure to be financially well prepared, but we don’t know exactly how prepared we need to be.
This is because saving for retirement is very different from other kinds of saving, like saving for a house or a car. When we are saving for something with a price tag, we can work out with pretty good accuracy what we need to do to meet our goals. But the amount of money we need to retire on is not fixed. This is because we don’t know when we will retire, how long we will live for, or the cost of the kind of retired life we want to lead. In particular, these questions impact our decisions on how best to invest our superannuation. What kind of risks can we afford to take?
This is where the flooring approach to retirement planning comes in. The flooring approach is a practical guide to helps ensure you have enough money to meet your needs and enough leeway to maximise your investment returns.
In this article, we outline the flooring approach and how it can be used to maximise a person’s retirement savings. Any advice given is general in nature, and you should consider whether it is appropriate for your circumstances.
What Is the Flooring Approach?
You probably have some ideas about what sort of quality of life you want to have when you finally stop working, but it can be hard to plan it so far out. This is made a lot more difficult when you are trying to work out how to invest your superannuation - do you invest it in safe bets or do you have a go at an investment that’s a bit more uncertain but holds a greater potential profit?
The flooring approach to retirement planning is all about finding the right balance between these two ideas. The basic concept is to work out what your most essential costs are going to be in retirement and to keep that amount of money secure in low-risk investments. Doing this means that you have a better idea of how much money you have leftover to invest in potentially more rewarding investments.
The Flooring Approach - Getting Started
The first thing you need to do is to sketch out the shape of your retirement. You need to know how long your retirement is likely to be and how much money you want to have on hand to cover it. This will give you a better idea of what your baseline or ‘floor’ is likely going to be. Here are some common questions that crop up in working this out:
What age can I retire?
This is a difficult one. The first thing to note is that you may not actually be able to decide the age that you retire. Many of us will be forced into retirement by things like forced redundancy, poor health, or being unable to find further employment opportunities. However, if you are lucky enough to choose your retirement age, it’s going to depend entirely upon what sort of life you want to live after you stop working.
It’s good to bear in mind the restrictions around accessing your super depending on your retirement age. You are entitled to access your super from between when you are 55 and 60, depending on when you were born. If you are 60 or older you are entitled to draw on your super tax-free. Also, if you are 65 or older you are entitled to access your super even if you haven’t retired yet.
How long will I live?
If only we knew the answer to this question with certainty. In any event, you can make a good guess of how long you can expect to live. If you are 65 today then you can expect to live to around 84.6 years’ old as a man and 87.3 years’ old as a woman. But if you are younger than 65 there’s every chance you will live a lot longer. If you retire at 60 and live until you are 90, that’s 30 years you will need to support yourself without a job. That’s almost like living your entire working life all over again.
How much super will I need to retire?
The Association of Superannuation Funds of Australia (ASFA) estimates that retirees who own a home can support a comfortable lifestyle on about $60,977 for couples and $43,317 for singles. ASFA suggests that, for a modest lifestyle, couples can expect to spend $39,775 each year, while singles can expect to spend $27,648 a year.
What is my retirement ‘floor’?
Now you can ask yourself the tricky question of what your baseline is. Remember, this is the minimum amount of money that you would be happy to live off in retirement. This number is going to be quite different for different people obviously.
A good idea is to work out how much money you currently spend each year on things like food, medical expenses, travel, and entertainment. You can adjust this figure based on how you expect it to change by the time you retire. For example, you should consider things like larger medical expenses, but also things like money to go travelling.
What Do I Need to Do?
Now that you’ve got a rough idea of how long your retirement is going to last and what your baseline figure is, you can start optimising the management of your finances. Here are the key things to do to reach your baseline and manage any extra funds beyond that.
Consolidate Your Super
One of the most important - and sometimes less obvious - steps to take in your retirement income planning is to work out exactly how much super you already have saved. Most of us move between different jobs throughout our lives and usually, each new employer has a preferred super scheme that they recommend their employees use.
This can often mean that our super is spread out all over the place. When we are still young, we can easily lose track of this money because we know we can’t use it for a long time. This might seem hard to imagine but it’s believed that Australians have lost around $16 billion in super funds they have left behind and forgotten about.
So, when getting your future financial planning together, make sure you work out where all those little bits of super are that you’ve left behind when moving from job to job. You may find that collecting this money together will already get you a long way towards laying down the ‘floor’ of your retirement funds. | Greater Bank
Think About Your Super Portfolio
The key to the flooring approach is to keep a good balance between low and higher risk investments. You should now know what your ‘floor’ is and you can work out some reliable investments towards which you can direct that amount of money. That’s your baseline and you want to feel confident it is going to remain secure - a steady return, without much risk of significant depreciation.
But you should now also have an idea of how much room you have to make potentially more profitable investments with money you are not contributing to your baseline. Make sure you seek out as much information as possible before putting your money into an investment. Talk to your parents, friends, or financial advisor to find worthwhile investments.
You also need to have a serious think about whether you can make a salary sacrifice to really give your superannuation a boost. You might not like the idea of doing this since you are going to have less money to play around within the present. But you should ask yourself how important it is to you that you are able to have a high quality of life during retirement, as well as now.
Making extra contributions to your super will also allow you to achieve your flooring goal sooner. This can take quite a large burden off you. When you know you’ve secured that baseline quality of life, you can start to feel more confident in investing the rest of your super more positively.
The Key to a Happy Retirement - Plan Early
The flooring approach to financial retirement planning is all about putting yourself in the best position possible to have an enjoyable retirement. However, the number one resource you need to do this properly is time. The way you invest your super now is probably more important than the way you invest it five or so years before you retire. In particular, putting your baseline figure in a secure investment now will mean it will have longer to mature into something greater. Also, planning early will give you greater flexibility in making those higher-risk investments.
Your idea of what your retirement is going to look like will no doubt change over time. But if you maintain a balance between what is essential to your retirement and what is extra, you are going to get the most out of your money.