Diary of a self-funded retiree: Entry 3

Welcome to the third update in my retirement preparation journey. In this series, I'm sharing how my wife and I are planning for the transition into retirement and what comes next.  

I'll be breaking down what we've already done to prepare and how we're planning to invest and spend our retirement pot. It will cover everything from budgeting to how much to help the kids (and grandkids) and what happens when we need full-time care. 

An update from my two previous diary entries 

In the first entry, I covered the steps we were taking to simplify our financial lives. In the second update, I looked at how we're investing for the long(ish) term - assuming we will have at least 25 years in retirement - and how we're managing our asset allocation.  

Since then, we've ticked a few more items off our list: 

• Closed old bank and brokerage accounts (I found another brokerage account!!). 
• Checked our asset allocation and added to our growth assets. 

That said, a few tasks remain, including consolidating my super accounts and starting an allocated pension. 

One follow-up note from the last diary update: I mentioned that "time in the market" is better than "timing the market." That old adage has been seriously tested over the past few weeks across all asset classes. We added more growth assets just before the tariff announcement - should we have waited? Yes. But did anyone know what was coming? No. We are confident that markets will recover over time. Our timing could have been better, but that's the hardest thing to get right - and I've yet to meet anyone who gets that right all the time. 

Diary entry 3: How we're budgeting for retirement and the tweaks we'll make if markets shift 

In this third entry, I'm digging into how we're managing the spending side of the equation - setting our retirement budget, whether it's sustainable, and what we might need to adjust if markets don't go our way. 

Budgeting for our retirement spending 

There are two main ways you can approach your retirement budget:  

• Estimating how much income you have and adjusting spending to that, or 
• Estimating how much you want to spend and creating a cash flow to match. 

After a bit of internal debate - partly reflective of my Scottish heritage - we've opted for figuring out how much we want to spend and then trying to match our cash flow to suit. Note that I call it cash flow because I look at the investment portfolio as cash-generating - which includes any capital gains - rather than relying solely on dividends and fund distributions. 

It is a bit scary when you look at your credit card statements and bank account debits over the course of a year. Do we really spend that much? To make it easier to analyse, we've broken our spending into the following buckets:  

• Essentials (groceries, car running costs, household maintenance, etc.) 
• Probably not discretionary items 
• Maybe discretionary items 

For now, we have ignored the big-ticket items - such as a new car or a major house renovation - as they are large capital costs and need a different budgeting process. 

One of the reasons we have categorised spending like this is to cope with potential market falls. My view is that a 5% fall in market values (bonds and equities), should be met with a 5% reduction in our spending - adjusted for inflation, of course. Breaking things out into what is easy to cut versus what we would miss dearly makes that process easier. 

Essentials 

These are obvious expenses we can't avoid - groceries, utilities, petrol, and so on. We do shop around when buying groceries, but we don't drive 30 to 40 minutes just to save 10% on toilet paper. The same goes for tradespeople - we use those who turn up on time, rather than the cheaper options who may not turn up at all.  

Health insurance is another essential, though I am double-checking our cover is appropriate - for example, we definitely don't need obstetrics! I recently had a hernia operation, and while the health fund paid for the hospital room, the out-of-pocket costs for the surgeon and anaesthetist were quite high. 

Probably not discretionary 

We like a glass of wine most nights and have swapped quantity for quality, so our spending is about the same, but we feel healthier. My wife is a member of a gym and does Pilates, and I have a golf club membership - again, these could be considered discretionary, but they're important for our sanity. We subscribe to a couple of newspapers, as well as Netflix and Spotify.  

My wife needs some costly dental treatment - maybe we can delay it, but it still needs to be done (and dentistry isn't getting any cheaper).  

We're lucky that our children, their partners (and our grandchild) live nearby, as we like taking them all out for dinner on birthdays and special occasions. 

Maybe discretionary 

These are the items that we could cut back on if markets fell and stayed down for an extended period.  

Recently, we have started visiting parts of Europe where we don't have friends or relatives to stay with. We enjoy these trips, and they're a part of our retirement plan. Where and when we travel may depend on where the Aussie dollar provides good value - Japan is on the list. 

We usually fly premium economy, but regular economy is fine if we're staying for a longer period. My wife prefers a few nights in a good hotel over a business class seat. 

We have gardeners and a pool cleaner who come every fortnight. I plan to stop both of these services when I'm fully retired and have more time on my hands. 

Big-ticket items 

For big purchases, like a new car, we plan to use a lump sum from our super fund. The next car will probably be a hybrid or electric model, which should reduce running costs, but we'll cover that in another diary entry. 

Will we renovate our home? We should probably downsize, but having a big house is great when the children come to stay. That, too, is a topic for another diary entry.  

Will retirement change our spending habits? 

There's strong evidence from the Association of Superannuation Funds of Australia (ASFA) that retirement spending changes significantly over time - typically people spend more in the early years (on travel and hobbies), less in mid-retirement, and then more again in later years as old age makes us more dependent on care. 

For us, having more free time means we will spend more time travelling to visit family, and since we're still physically able, there's nothing stopping us from skiing or trekking, for example. 

Is our retirement cash flow going to be enough? 

Having done all the budgeting, the question is whether our SMSF can generate enough cash flow to cover everything. We are lucky to have a good-sized pot of super between us, and a house with no mortgage. When I compare my after-tax salary plus after-tax passive income for my wife, we can comfortably match that with a 5% tax-free return from our super assets. 

However, that doesn't factor in the effects of inflation or having to take out lump sums to pay for big-ticket items such as a new car or home renovations. If we assume the long-term inflation rate is 2.5% (including recent jumps), we really need a 7.5% tax-free annual return. According to the Morningstar Australian Growth Target Allocation Index, a diversified growth model has produced 7.18% a year over the past 25 years - close enough. 

The alternative is to have additional sources of income - "income layering" - such as a part-time role. At 67, those jobs can be hard to get, but there are some options. At the end of the day, there is the government pension, though it will only ever provide a modest safety net. 

What about an allocated pension now? 

As mentioned in previous diary entries, I have considered converting part of my super into an allocated pension. The main benefit is that all income and capital gains become tax-free. At my age, I need to withdraw 5% a year.  

The issue is that I don't need the extra cash flow while I'm still working, and we have other assets outside of super we can draw on. We also can't contribute to our super for the next year or so because we've reached our caps. Income earned on assets is taxed higher outside of super than in the super fund, so we might hold off for now.  

My top tips  

• Markets will rise and fall - it is important to stay invested as they always recover. 

• Constantly review your spending - but don't stress about it when things change. 

• Decide what spending is important to you and what you can reduce (maybe temporarily) if you have to - retirement requires some trade-offs. 

• Be aware that your spending will change throughout retirement - it may reduce over time and then increase in very old age. 

• Make sure you estimate how your spending might change with inflation over time. 

• Don't forget to budget for big-ticket items - cars and homes do need updating. 

• Look at your super to generate cash flow - it doesn't all have to be income and franking credits. 

• Retirement should be a good time - look forward to it and stay healthy.  

What's next?  

In the next few entries, I'll look at what we think about downsizing, what the choices are for aged care (it's never too early to plan), helping with grandchildren's education costs and charity. 

Diary entry 4 will be published on 19 June 2025. You can read entry 2 here.