Planning your retirement for a comfortable retirement is difficult— most people make mistakes when creating a retirement plan.
Try to avoid the top three common mistakes below.
Not creating a retirement plan
Age pension should suffice to finance expenses after retirement. However, many factors need to be considered, such as inflation, rising cost of living, and one’s own longevity that can change the sufficiency of retirement savings.
Retirees have various misconceptions about what age and when to create a retirement plan, such as these assumptions below.
Being too young: “I’m only in my 20s and just started working. I’m too young to think about retirement.”
Contrary to common belief, younger people have a bigger chance of saving more for a comfortable lifestyle. In reality, one is never too young to start.
Putting off retirement planning until you have a higher paying job can cause unpredictability in savings. Start saving up as early as possible instead of relying on savings earned in 10 years’ time.
Being too old: “I’m already in my 50s and I’ve missed my chance. I’m too old to start a plan.”
Giving up on the idea of a comfortable retirement because their age is closer to retirement age, is a belief that retirees should banish—there are still ways to catch up.
Options such as doing additional contributions in superannuation funds through salary sacrifice, altering superannuation investment strategies to meet objectives, and shopping for a different retirement fund management and roll-over funds to it, can increase retirement savings in a short amount of time.
Costing too much: “A comfortable retirement would cost too much for my income level. I can never stop working.”
Retirees can believe that working in their senior years is necessary: the threat of never being able to ‘afford’ a comfortable retirement can pressure retirees.
Save up little by little, even if you have a low income. The government co-contributes with low-income employees an amount up to $500 if employees make a personal contribution of at least $1,000.
You can talk to a professional financial adviser to help map out retirement goals and investment strategies.
Thinking life works on a schedule
While the typical age of retirement is 65 years old, the average human lifespan can be somewhere between 82 and 87 years old.
Retirees have various misconceptions about what age and when to start retirement planning, such as these assumptions below.
Living too short: “Statistics show that people my age have about 22.3 years more to live after retiring at age 65.”
While the life expectancy put out by various agencies, such as the Australian Bureau of Statistics, show that a person will live until age 87 these simply serve as guidelines for creating a basic retirement plan. Certain individual circumstances such as lifestyles or accidents can prolong or shorten one’s lifespan.
Uncertainty of financial capacity: “I just need 10-15 years to save for retirement at my current income so setting it up can wait.”
One’s comfortable retirement can be affected by the effects of possible future inflation and economic downturns. Purchasing power can decrease in the future, affecting the worth of your retirement savings.
Uncertainty of the future: “I’ll be working until age 65, so I’ll just top up my Super when the balance cap eases.”
A person can work longer since there are many modern advancements in science, technology, and medicine that help fight off diseases to help individuals live longer. However, diseases can also mutate and affect one’s health, spending too much on medical expenses. As much as possible, consider enrolling in life, health, and other similar types of insurance and investments.
Another possibility is that one’s employment can potentially change: sometimes employers can force their employees to retire early because of redundancies or the business itself can shut down early. This may mean that savings can be easily depleted if one doesn’t save enough.
Not paying attention to what’s in their nest egg… or paying too much attention
Because of the superannuation system, Australians have better retirement options. However, some retirees are too passive: letting their funds accumulate without guidance resulting in little growth. Take a more active role in your investments by considering avoiding these below.
Staying long-term with an employer is not enough assurance of a well-funded retirement plan. Nor is frequently changing jobs enough reason to forget about thinking about one’s retirement.
Some contributors just look at the total amount in their super fund and forget that it is subject to tax. Some employees forget that different employers have different super fund choices. Employees who change jobs may have several supers with small contributions and should roll over all funds into one preferred account.
If super contributions are inconsistent, the fund could miss out on a high growth period on investments.
Know where your retirement funds are invested determine if the fund’s strategy is in line with a person’s financial objectives and risk tolerance.
While having safe investments are important, playing too safe to avoid risk could mean less income during retirement years as safe investments tend to lock in capital for a long period.
Risky investments can achieve greater returns in a shorter period, but the possibility of loss of a large portion, if not all, of their money can happen.
Regularly rebalance your portfolio to increase defensive investments when you get close to your retirement age, ensuring lesser risks to savings.
Speak to financial experts to have a clear idea of retirement goals.
This information has been sourced from ASIC's Moneysmart and Virginia Society of Certified Public Accountants.