2020 has seen people make big changes in their lives – cancelling travel arrangements, dealing with unemployment or home-schooling children. And the current market downturn certainly hasn’t helped those considering retiring this year.
But whenever you’re approaching retirement, you should think about how to protect your nest egg over the coming years. Ensure your retirement strategy is still the right one for your circumstances, whether that’s how you’re invested, ways to create an income stream or eligibility for the Age Pension.
We’ve put together a list of five things to consider if you’re retiring this year.
1. Remember the 10/30/60 rule
The 10/30/60 rule suggests your retirement income comes from three sources.
- 10% from money you saved during your working years.
- 30% from investment returns before you retire.
- 60% from investment returns during your retirement.
To achieve your retirement goals, it’s therefore critical to earn a good return on your money while you’re retired, not just while you’re making contributions. In early retirement, most money you withdraw comes from your investment returns, only later do you start drawing down on your capital.
So, even if your super balance has dropped in recent months, it’s not all bad news. There’s still plenty of time for your investment to continue to grow while you enjoy life as a retiree.
2. Invest wisely
Having the right mix of assets is essential during your working life and when you retire. The 10/30/60 rule clearly shows why.
Many people mistakenly think once they retire their money stops growing. But a sound long-term investment strategy should keep your nest egg growing as you start to withdraw from it, based on your investment timeframe and tolerance for risk.
Including growth assets (shares and property) potentially allows you to generate higher investment returns and therefore prolong the need to draw down on your capital. Plus, being too cautious might mean your money doesn’t generate enough growth and your retirement savings may not last throughout your lifetime. Ensuring your super is well diversified can help smooth out and reduce the volatility of returns and severity of any negative periods.
3. Be market aware
No-one knows how share markets will behave in the future. After all, who could have foreseen the COVID-19 pandemic – a health crisis with such devastating economic consequences.
However, history shows us markets are cyclical and after a fall comes a rise. The challenge for pre-retirees is how to manage an unexpected market downturn close to their retirement date.
Having an eye on financial markets as well as a good relationship with a financial adviser can provide reassurance during difficult times. Investors who panic and cash out their investments after share markets have fallen often regret their decision, having both crystallised their losses and potentially missing out on any upside when markets recover. But that doesn’t mean you shouldn’t adapt to changes in market conditions as you approach retirement, regardless of whether markets are booming or declining.
4. Consider a transition to retirement strategy
If you’re asking yourself, “when can I retire?”, you could consider a transition to retirement (TTR) strategy. If you’ve reached your preservation age and you’re still working, it could be an effective way to reduce your working hours without reducing your income.
Work fewer hours and use a TTR pension to supplement your income.
Salary sacrifice some of your salary into super and use a TTR pension to replace the lost income, even if you continue working full-time.
The taxation benefits of TTR is one of the big drawcards.
If you’re aged over 60, any money you receive from a TTR pension is completely tax free.
And even for those under 60, when you salary sacrifice or make a voluntary concessional contribution into your super, these are taxed at the concessional rate of 15%. Plus, all earnings are also taxed at 15%, rather than your marginal rate, which is generally better than investment earnings outside super.
The other advantage of TTR is the ability to use the income to pay off non-deductible debt like a home loan or credit cards. This could reduce your overall financial burden or even remove completely it by the time you retire.
5. Take your time
If you’re thinking about retiring this year, make sure you’ve given yourself time to plan properly – and that includes planning for the unexpected.
The Government has given retirees a helping hand during the current pandemic and reduced the minimum pension drawdown rates for retirees. This means they aren’t forced to sell their assets at a time when their value is reduced just to fund their income stream.
But this is unlikely to be the case in every market downturn.
A major risk facing all pre-retirees is sequencing risk – the risk that the timing of withdrawals from super will damage your overall return because financial markets fall in the years leading up to your retirement. You may choose to delay retiring, reduce your spending, postpone travel plans or make different lifestyle choices.
Good financial habits hold true in retirement as well as when you’re working. So, think about how your living expenses will change when you retire and make sure you have enough accessible cash to cover a couple of years ahead. It’s the same as having emergency funds while you’re working to cover daily essentials and means if financial markets drop again or continue to be volatile, you won’t have to sell shares or bonds at a low price.
Keep the dream of retiring this year
There’s no one right answer to the question “when can I retire?”. Your circumstances will let you know when the time is right for you.
Financial markets will always be unpredictable so have a plan you’re comfortable with and follow it. Invest according to your risk tolerance and find the appropriate balance between short-term accessible cash and long-term investment growth so you can enjoy a long and happy retirement.