Many aspire to retire at 60, hoping to enjoy an active and healthy lifestyle. While early retirement has its appeal, it’s crucial to recognise the financial implications of potentially funding a retirement that could span 40 years. This extended period requires careful planning to account for unforeseen circumstances and evolving needs. Retirement is a significant milestone, and thoughtful preparation can help ensure a secure and fulfilling future. Here are six critical considerations to address before retiring.
Your post-retirement income
When determining an appropriate retirement income, avoid relying on general rules of thumb. Each retiree has unique circumstances that require thorough analysis to establish an income strategy tailored to their needs. While certain expenses, such as mortgage repayments and retirement contributions, may decrease, it’s essential to account for new costs that could arise. Healthcare expenses tend to escalate with age, and other factors, such as international travel to visit children abroad, could significantly impact your budget. Notably, travel expenses are often capital outlays and may not be covered by annuity income. Additionally, maintaining an active retirement involves planning for hobbies, interests, and sports you wish to pursue. Failing to budget adequately for these pursuits may result in financial shortfalls that hinder your ability to enjoy retirement as envisioned. Careful, personalised financial planning can help ensure a secure and fulfilling retirement, aligned with both your lifestyle and long-term financial goals.
Your sources of retirement income
The next step is to review the investments earmarked for your retirement and gain a clear understanding of their workings. This includes assessing when funds can be accessed, how much can be withdrawn as cash, the specific rules governing each investment, your available options at retirement, and the tax implications. Given the pension fund industry’s complexity and stringent regulations, making timely and well-informed decisions is crucial to avoid costly errors.
It is essential to evaluate your investment strategy in the year leading up to retirement to ensure alignment with your retirement timeline. Adjustments may be necessary to meet your objectives, especially as most retirees hold a blend of retirement funds and discretionary investments. Understanding the tax treatment of these assets is vital in crafting an effective strategy.
Decisions made at retirement are often irreversible, and their impact on your financial security cannot be overstated. Avoid considering any single investment in isolation. Instead, work with an advisor who takes a comprehensive view of your portfolio to deliver tailored retirement, tax, and estate planning advice. This holistic approach ensures your financial strategy aligns with your long-term goals, empowering you to retire with confidence and security.
Investment risk
Transitioning from earning an income to drawing one requires a significant psychological adjustment. While it may feel safer to adopt a conservative investment strategy to preserve capital, being overly cautious can jeopardise your long-term financial health. With a potential 40-year retirement horizon, considered long-term by investment standards, exposure to higher-risk investments can increase the likelihood that your wealth will outpace inflation. This ensures that your invested capital grows in real terms, even as you draw from it.
Overweighting your portfolio in cash and bonds may limit returns, making it difficult to keep pace with rising living costs, potentially leading to liquidity issues later in retirement. Although short-term market volatility may cause unease, maintaining a strategic, growth-oriented investment approach aligned with your timeline is vital. Remember, focusing on the long-term nature of your plan helps balance immediate concerns with the goal of sustaining your financial security throughout retirement.
Whether you can afford to retire
After determining an appropriate retirement income, the next step is assessing whether your invested capital can sustain this income. This process, best undertaken with an independent retirement advisor, involves developing various retirement scenarios based on stress-tested assumptions. These assumptions should account for factors like life expectancy, investment returns, inflation, medical inflation, and potential capital outlays.
Accurately estimating expenses at different stages of retirement is critical. For example, travel costs might be higher during the early, more active retirement years but could decline with age as mobility decreases. Conversely, healthcare expenses are likely to accelerate significantly in later years.
It’s essential not only to set sustainable drawdown levels but also to plan for potential capital outlays during retirement. These could include funding a wedding, purchasing a life rights unit, or covering significant home renovations or modifications. Comprehensive scenario planning ensures your financial strategy adapts to evolving needs, providing confidence and security.
Boredom
While early retirement may seem ideal, it’s essential to consider how you’ll spend your time, potentially for the next 40 years. Transitioning from a structured, purpose-driven schedule to unfilled days may initially sound appealing, but the challenge of staying meaningfully engaged can be daunting. A lack of purpose not only risks leading to boredom but can also impact your self-worth and identity.
Re-entering the workforce after retirement can be difficult, depending on your qualifications, experience, and industry. It’s crucial to be certain that a work-free lifestyle aligns with your goals and needs. For those who’ve been employed until retirement, their professional identity often forms a significant part of who they are. The loss of this identity, along with workplace camaraderie and peer engagement, can be difficult to navigate. Thoughtful planning can help ensure a fulfilling and purposeful retirement beyond just financial security.
Retirement accommodation
If you retire at a relatively young age, your family home may initially suit your needs, and maintaining it might not be a challenge. However, as you progress through the different stages of retirement, your accommodation needs are likely to evolve. With the high cost of quality retirement accommodation and lengthy waiting lists, it’s essential to start planning early.
Retirement villages, often structured on life rights, have gained popularity for their convenience, favourable cost structures, and enhanced security. For many retirees, these developments provide peace of mind with access to assisted living and frail care facilities—though these services come at a premium that must be accounted for in your pre-retirement planning. Without a carefully budgeted long-term healthcare plan, you risk relying on adult children for care, a scenario most retirees aim to avoid.
If your retirement funding depends on the equity in your home, timing the sale strategically is crucial. Property markets fluctuate, affecting the value you can realise from the sale. Retirees often delay selling their family home for sentimental reasons, which can lead to a poorly timed sale and a diminished retirement nest egg. Careful planning, considering both your future accommodation and financial needs, is key to securing a comfortable and well-funded retirement.
As is evident from the above, retirement planning is multi-faceted and all-encompassing and should be undertaken with the guidance of a retirement planning expert to ensure that decisions are made timeously, sequentially and appropriately.
Have a great day.
Sue
