Everyday we calculate retirement savings projections for clients, which means we work out how long their money will last once they retire. We brainstorm different strategies and investment options for them and play each scenario out with a projection to find out which one will make sure their retirement savings will go the distance. There are always some common denominators with these options, and there are some things everyone can do to add longevity and stretch to their super or pension. These are the things we recommend looking at:
1. Pooled superannuation funds can work against you in retirement.
A tax free retirement income stream is a great option when you retire. But having your retirement savings in a pooled retirement fund, will probably work against you in the long term.
A pooled fund is where your money is invested with all the other members money. Your pension is funded by selling down your holding in the pooled fund. For example, the graph below shows that this pooled fund has invested 30% of your money in Australian shares. So, for a pension payment of $1,000, an amount of $300 is sold from your Australian share investment, $250 from Global shares, etc.
In the event of a market crash, such as the Covid crash or the Global Financial Crisis, pension payments in a pooled fund are funded by selling assets that are falling in value, beacuse any income you make on these investments are then re-invested back into them.
By investing in ‘sector’ funds and using a ‘cash account’ as the transaction hub of your retirement account, you can protect your assets from a market downturn.
For example, in the diagram below, all income from the investments in this retirement fund is paid into a cash account. Pension payments are made from the cash account, not by selling down assets.
A simple and effective way of making your money last longer!
2. Make sure you’ve got the right investment strategy, even before you hit retirement age.
Even if you’re not at retirement age yet, it’s never too early to make sure your superannuation is invested in the right investment option for you. When you first join a super fund, you’ll be placed in the default fund, which is a stock standard option and may or may not be right foryou. You can change this at any time, though. It’s worth taking the time to look at your investment options, and to make a considered decision on which option is best for you. Things you need to consider include the risk level of the investment option, fees, how close you are to retirement age and how long you’re willing to keep your money invested in super. If you’re in your 30s or40s you might be willing to take on a riskier option with the chance of earning higher long term returns as you’ll have time to ride out the market highs and lows. If you’re nearing retirement age, you might want to go with a more conservative option, knowing that you’ll be in pension phase sooner rather than later.
3. Know where your cash is going & make sure you’re spending money on the right things.
It sounds simple, but it’s something we preach all the time – to make the most of your money you have to know where you’re spending it. We’re not here to tell you to spend less money or to be frugal, but we are here to tell you to put your money towards the things that will genuinely make you happy. Acknowledge any stress you’re feeling as a result of “spending guilt” and use that as your motivation to tighten up your cashflow. Give yourself permission to spend money on things that genuinely make you happy like your hobbies and working towards your goals. If you don’t already have a rough cashflow plan, it might be time to sit down and write one out. Look at your expenses in detail and categorise your spending into essential (bills, medical expenses, etc.) and non-essential (online shopping, going out for dinner, etc.). Look to see if there are any areas of spending that aren’t “sparking joy” for you. This will give you something to work with and maybe help you keep your expenses down to things that really bring you happiness.
4. Your financial resources should be providing for the lifestyle you want to live.
Your lifestyle shouldn’t be dictated by how much money you have in the bank. A good financial plan is one that helps you live the way that you want to, by creating an income from your assets and investments that supports the life you want to live. Your plan should be structured around your goals and your passions. From really getting to know our clients, we know thata happy retirement is one where you have the freedom and the choice to live the way you want. Knowing your goals and your passions and having a financial plan that works to support these is the best way to achieve this.