Our 40s are a crucial time in our lives when we start to develop our own financial freedom. Our kids are growing up and we’re steadily reducing our mortgage. The odd grey hair starts to appear and reading glasses become a fashion accessory.
Even though it feels like a long way off, the smart ones among us start planning their dream retirement in their 40s. To put yourself in a great position, follow this simple seven-step process.
Step 1: Set your time frame
Setting a planned retirement age is a great way to help focus your mind. Some of my most successful clients set themselves the goal of retiring at a relatively early age. You’re not committing to anything and you can clearly change it later, but it’s a wonderful start to your retirement planning. This will then tell you how many years you have to save (eg, 20 years or 25 years) and how long you need your dream lifestyle in retirement (eg, from age 60 to age 90 or 30 years).
Step 2: Review your super fund
Shop around and determine if your existing super fund is the best fund for you moving forward. Understand the fees you pay; the insurance they provide; the investment options; and the fund’s long-term investing performance.
Before switching funds, ensure you understand any employer benefits you may be receiving or any insurance cover you may have. Consider switching to a low cost industry fund or, if appropriate, your very own SMSF.
Step 3: Review your super investments
If you have 20 years until you can access your retirement funds, you clearly have a long-term investing time frame. This means you can afford to take more risk on a growth strategy and expect higher returns than investing conservatively.
Work with your chosen super fund to educate yourself about the right asset class mix for you. To start, ensure you have exposure to defensive assets, Australian and international equities and commercial property. If you have a choice between high-cost investments (eg, managed funds) and low-cost investments (eg, exchange traded funds), take the low-cost option.
Step 5: Tax-efficient super contributions
Every year 9.5 per cent of your pre-tax salary goes into your super in a tax-efficient manner, boosting your retirement savings. If you’re lucky, your employer may also contribute a bit more.
If you can afford it, consider topping this up by salary sacrificing some of your pre-tax salary. By doing this not only do you boost your super savings, but you save on the tax you pay – win/win!
Step 6: Smart use of your cash flow
At various times in your 40s your cash flow will likely improve. This could result from a bonus or a pay rise. Or a child or two may finish Year 12 at their private school. Or you may have reduced your mortgage to a reasonable level. In each case, take advantage of this wonderful opportunity.
Instead of letting your expenses increase to absorb this additional cash flow, deliberately siphon off the exact same additional amount to your retirement savings as after-tax (or non-concessional) super contributions. You can live to your existing budget and fund your dream retirement at the same time.
Step 7: Future-proof your retirement plan
In the words of Robert Burns: “The best laid plans of mice and men often go awry.” This is also the case when it comes to your retirement planning.
Should something happen to you and you don’t have insurance, this can knock your retirement planning for six. A divorce can shatter your future finances just as much as it shatters your family life. Continual government tinkering with the super rules leads to uncertainty and lack of action.
To future-proof your future retirement savings, ensure you have adequate insurance and understand the full financial implications before you separate.
Governments will always tinker with the super rules so your best plan will be to operate to the existing rules as they stand. Be mindful that super rule changes typically grandfather existing things you have done and often provide you with lead times to adapt and implement.
According to Benjamin Franklin: “At 20 years of age the will reigns; at 30 the wit; at 40 the judgment.”
Our 40s are a wonderful opportunity to use that judgement to take control of our retirement planning. Your exciting goal is to confidently fund your dream retirement lifestyle.
Claire Mackay, principal, Quantum Financial
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