Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.
You know when you’re on a plane about to take off and the cabin crew is demonstrating the safety procedures? They always say affix your own oxygen mask before trying to help anybody else attach theirs – children included.
Research from the National Seniors Survey for 2017 has found that it is no longer a priority for many older Australians to leave an inheritance for their kids.
With growing concerns about having enough savings to last a lifetime, this article looks at some of the reasons why it’s important to put yourself first when planning for your retirement years. In effect, attaching your own oxygen mask first.
Anne Graham is a CERTIFIED FINANCIAL PLANNER® professional and managing director at Story Wealth Management in Hawthorn in Victoria. In her own words, she loves retirement planning and helping people think about it in different ways that suit them.
“It all comes down to peace of mind and confidence, and they are linked to regular income and preserving capital. Retirees now don’t want the lifestyle their parents had,” says Graham.
Long live retirees
She says that with people today living much longer than previous generations, a retiree at age 65 today could have 25 years or more in retirement, unlike in years gone by “when it was more like 10 years”.
“Longevity is front of mind, people are living longer. The most important consideration for people planning for their retirement is regular and reliable income that will last as long as they do. If they give their money away, it puts them in a vulnerable position from an income perspective.”
Part and parcel of living longer is that retirees are more active, healthy and adventurous than previous generations.
“And they want to do things which cost money,” says Graham. “They are also often retiring earlier which means they need more money to fund their dreams of travel, for example.”
Important considerations for retirees
Here are the crucial factors Anne Graham believes people need to take into account when planning for their retirement.
Lifestyle and access to capital
Retirees need to be able to access capital in emergency.
“A lot of people are aware that things don’t always run smoothly and access to capital to fix a roof, buy a car, or cover an emergency is important. They want to be able to remain independent, use their own funds and not have to ask others for money,” she says.
Reduction in age pension and social security
This means reliance on your own funds is much more necessary now than it was in the past.
There is a realisation that the adult children will eventually get the family home, which holds a great store of value. This means they don’t also necessarily need assistance along the way from parents, which may eat into retirement funds. Therefore, you should take this asset in to account when deciding what inheritance, if any, you will leave for your children and whether it is worth providing financial assistance to them in your retirement years.
Fear of another GFC
The Global Financial Crisis spooked a lot of people and there is a more conservative approach to investment and asset protection than 10 years ago.
Making sure retirees have funds to cover health costs in older age is important – giving choice to treatment, doctors, timing of treatment and so on.
“Even though we are living longer our bodies and minds aren’t necessarily keeping up; hence increased health expenses. For example, dental costs aren’t covered by Medicare and there are large gaps in private health cover. These costs can be extremely high. As can a replacement hip or knee.”
Having security of residence is critical as we age and owning a home is ideal. If retirees aren’t looking after themselves financially then their peace of mind is threatened when the place they live is not secure. If the home is not owned, then there has to be sufficient capital to fund rent or other accommodation costs. Public housing is in very short supply and generally not an option.
You should focus on repaying or managing debt at all life stages, but this is especially important as you near retirement. If debt can be eliminated at retirement that gives retirees greater certainty and control, as they aren’t subject to rising interest rates, for instance.
The cost of aged care is means-tested and rising. There is a growing appreciation of this cost, and many retirees want to know that they can fund these costs if the time comes. It is also important to consider that, while many older people dislike the idea of moving in to care and hope to remain in their home until the end, sometimes circumstances – such as health issues that arise – will prevent this. Having a plan in place to ensure you have choices and options in this area should the need arise is important.
Low return environment
“Years ago if a couple had $600,000 invested in a term deposit they could earn around 7% giving them income of $42,000pa. They would also qualify for part age pension, giving them an overall comfortable income without necessarily drawing on capital.
“Now the rate might be 2.5% giving them income of $15,000 and no pension. The only way for them to maintain their lifestyle is to draw on capital which will eventually reduce to zero. If they don’t look after themselves first then their quality of life will reduce, as they won’t have the capital to generate income, and they’ll be spending it faster,” says Graham.
The best way to plan for your own retirement and address any or all of these points is to work with a CERTIFIED FINANCIAL PLANNER® professional, regularly discussing such matters before you retire and are able to exert more control over your options.