For much of our working life, the idea of retiring can be very exciting if not extremely appealing. But when retirement comes, it can suddenly be very provoking. It's not just about realising we're getting older, it's the idea of managing your money for more than 30 years when you don't have a regular salary coming in.
Here is our pre-retirement list of considerations
Super & Life Insurance Check
It’s a no-brainer that pre-retirement is a time to take a very close look at your super. Assess the different options for using your super when you retire. Consider whether you need to keep paying life insurance through your fund – or could you just dial down the premiums? If you have paid down debts and your kids are all grown up, you may not need as much cover. Opting out of life insurance means savings on premiums, and that’s extra money for retirement.
Get a retirement budget ready– and test it
It’s all very well to have a budget in mind for your retirement. But can you really stick to it?
The only way to know is to give your budget a trial run.
If you’re thinking about retirement, the no. 1 issue can be debt. When you’re on a fixed income in retirement, you really don’t want the burden of loan repayments that will eat into your budget.
Many are buying homes later in life – and we’re paying more for our homes, so the debts are bigger. Not surprisingly, that is why more Australians head into retirement still paying off a mortgage.
There is an argument to say it makes better financial sense to put more money into your super ahead of retirement rather than paying down the home loan. That’s because you could be paying maybe 2-3% interest on a mortgage while super has returned higher returns over the last year. This can be an area where professional advice clarifies the best strategy for you.
The last thing you need is to find yourself asset rich, cash poor in retirement. It can easily happen if you hang onto a home that may have been great for raising a family but becomes a millstone in your senior years.
Leaving a much-loved home can provide anguish. But it is important to be realistic. Big homes come with big maintenance and insurance bills. They can also become challenging to live in as we age, especially if there are stairs.
If you’ve owned your home for many years, it can be surprising to discover just how much equity you have. The upside of downsizing is that it lets you tap into this equity – funds that could be used to pay off what’s left of your home loan, and buy a lower maintenance place to live in.
Downsizing can also offer opportunities to grow your super. From 1 July this year, you can be as young as 60 to take advantage of downsizing super contributions, down from 65 at present. It’s a way of letting a couple boost their super by as much as $600,000. The appeal here is that it’s a way of shifting profits on sale of your home into super’s low tax environment, and in retirement, tax savings are very attractive.
The catch of downsizing and adding to your super, is that it may impact age pension entitlements. You home is exempt from assets test, but super is not. Again, this could be something to seek advice on.
Retirement Transition Strategy
We can’t normally access our super until reaching preservation age. That’s generally 60 but depending on when you were born it could be earlier. But if you’re not ready to retire full time at this stage, it is possible to dip into your super through a transition to retirement pension.
This can let you wind back your working week, and use super to supplement your take home pay, while still being able to grow your super through employer contributions.
There are limits to how much you can draw out of your super through a transition to retirement pension. Most notably, you can’t take cash as a lump sum, only a regular income stream. Dipping into your super early can also reduce the funds available for full-time retirement. So, it’s another area where it’s worth getting good advice.
The main point is that retirement could be a lengthy life stage. That’s great! But it also makes it worth planning for so that you can put your feet up, free from financial stress.
Stu Varidel and Your Choice Financial Planning Pty Ltd trading as Heart Financial Advisers are authorised representatives of Sentry Financial Services Pty Ltd AFSL (Australian Financial Services Licence) 286786.
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