How to make your retirement more comfortable
Vanguard’s new study looks at common problems that impact your final retirement outcomes. We present resources to help.
Retirement is a financial goal shared by most of us, but it is deeply personal to each of us. The way in which we retire is highly dependent on our personal circumstances. These personal circumstances have a large influence on our outcomes.
In a perfect world, we all retire with enough money to comfortably last until death. It is not a perfect world. Many people struggle to make limited resources last as long as possible.
Vanguard’s ‘How Australia Retires’ report outlines how substantial an impact our differing circumstances have on retirement outcomes. The report surveys 1,800 working Australians focusing on attitudes towards retirement and choices regarding retirement savings.
There were several insights in this report that may impact your final retirement outcome. Based on the circumstances captured in the report I've offered suggestions to increase your chances for a comfortable retirement.
Career breaks
Around 40% of working age Australians expect to take an extended break from work, and 1 in 2 under 35 expect to take parental leave.
Career breaks can come in all shapes and sizes. A break can be used to care for elderly family members, as parental leave, for extended travel or for study. Regardless of the reason, it means that your superannuation contributions will stop. The exception to this is parental leave, where there’s government mandated contributions from your employer.
Government mandated parental leave contributions may not be adequate. Many women take a longer period off work to care for new children (an average of 32 weeks leave) than the mandated parental leave benefits (22 weeks of leave).
The issue with career breaks, especially earlier in life, is that your contributions have less time to compound. The impact of longer career breaks is significant for superannuation balances.
Source: Vanguard ‘How Australia Retires’ report
Extra contributions prior, during or after the career break
For career breaks that are planned or unplanned, extra contributions in the lead up, or upon your return to work, can ensure that you do not end up with lower retirement outcomes.
This can be done in a few ways. Planned career breaks are relatively straightforward – it is important that you financially plan for these breaks. A plan will enable you to replace the contributions that you will miss during your break.
Unplanned breaks are a little more difficult. These breaks mean that you will often be dipping into savings or emergency funds to support yourself and will not have the resources to also contribute to your retirement.
A good tool to use is the MoneySmart Superannuation Optimiser. Regardless of career breaks, it gives you a general idea of how to optimise your contributions into super while taking your take home pay into account.
Spouse co-contributions
If you have a spouse, there are ways that they can contribute to your super. The first is contribution splitting. Contribution splitting allows you to split the super contributions that have been made. This can include up to 85% of the contributions in that financial year.
Changing asset allocation
If you have a while left until retirement, you’re able to take on a more aggressive asset allocation to account for missed contributions. We talk about this in detail in our Portfolio Review episode.
Lack of confidence, resulting in more conservative portfolios and smaller portfolio outcomes
Mark LaMonica recently wrote about how confidence can impact investment decisions. 50% of men surveyed ranged from “very” to “extremely confident” about making decisions related to managing their finances. A third of female respondents (33%) indicated the same.
On the other end of the spectrum, 11% of men surveyed indicated “slightly” and “not at all confident” about their financial decision-making. This compares to 23% of women surveyed.
The research also found that women were less engaged with their super funds than male respondents. This is true regardless of their retirement status. The results showed that it was only towards retirement that women tended to contact their super fund. Men had a similar level of engagement with their superfunds across their life stages. Women were also less likely to make additional contributions to their superannuation.
How can you increase confidence
The best way to increase confidence is to invest in the right assets to meet your goals. This will ensure you understand what you’re invested in and why. Successful investing requires work. There is no silver bullet, and there’s no shortcuts. Start with defining what you are trying to achieve, and work from there.
Overtrading and overconfidence comes from seeking wealth maximisation. That is a focus on maximising your money instead of having a clear goal in mind and working towards that goal. The following resources will help:
• Investment Policy Statement
• Portfolio construction webinar
• Plan for retirement webinar
Anxiety about retiring/stopping full time work
50% of working-age Australians want to retire with a yearly income significantly higher than the yearly income currently required by older generations. On top of this, the study found that those who are ‘highly confident’ in their retirement outcomes have actively prepared. A large part of preparing is defining how much you need in retirement, and making your money last when you are in retirement.
Estimating how much you actually need in retirement
None of us know when we’re going to die, and therefore have no set answer for how much we need in retirement. This does not mean that you’re not able to estimate how much you need for a comfortable retirement and work towards that.
Having a realistic goal in place, especially if you have the benefit of time on your side, will reduce the anxiety that comes with the unknown. This article goes through how to estimate how much you need in retirement.
A bucket strategy
A bucket strategy is a retirement withdrawal strategy that involves a carefully diversified portfolio, with various time frames that are structured to help you meet income needs in retirement.
The ideal scenario for a retiree is that they have enough money so that they can live off their income. Instead of having to work, your portfolio pays for your life by generating dividends and interest. The advantage of this scenario is that it doesn’t matter what the market does – it goes up and it goes down, but you just keep collecting and spending your dividends. In this scenario, you never run out of money because you aren’t selling off any of your assets – they are just being used to generate income.
This is not a realistic scenario for most of us. A large portfolio is needed to support a comfortable income level while maintaining buffer to account for dividend and income fluctuations.
The bucket strategy has been designed to help retirees create a pay check from their investment assets. The strategy is based on the simple premise that the worst sin an investor can commit is be forced to sell at a bad time. That is why we encourage investors to have an emergency fund. We have an emergency fund because we don’t want to have to sell shares if our car breaks down. The break down may occur when the market is plummeting which forces an investor to sell low.
The bucket method is a way to sell shares when the timing is right. Short-term spending needs are kept in cash. Longer term needs are kept in investments that may bounce around in value in the short-term but will earn higher long-term returns.
Having a structured approach such as this can reduce retirement anxiety.
You’re able to find resources on the Bucket Method below:
• An article explaining the bucket approach to retirement allocation
• An article exploring retirement bucket basics
• Bucket strategy webinar
• Investing Compass podcast episode on the Bucket Strategy
Retirement is individual to all of us. A commonality is that preparedness and education can increase the likelihood of a comfortable retirement. Both these steps will increase the confidence that you have in your retirement strategy which provides something we all seek -peace of mind.
