Preparing for life after work

I’m a big fan of checklists, and that’s a good place to start planning for retirement. Here’s what I’d be putting on my pre-retirement list.

1 Pay down debt

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 interest costs that will eat into your income.

Many of us are buying homes later in life – and we’re paying more. Not surprisingly, that’s seeing 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 3-5% interest on a mortgage while super has returned between 7-9% over the last year[1]. This can be an area where professional advice clarifies the best strategy for you.

2 Draw up a retirement budget – and road test it

It’s all very well to have a retirement budget in mind. But can you really get by on it?

The only way to know is to give your retirement budget a trial run. Bear in mind, a working week is very different from a retirement week. So, allow for some flexibility.

3 Assess your home

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 be a wrench. 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 multiple stairs.

If you’ve owned your home for many years, it can be surprising to discover just how much equity you have in the place. 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. 

4 Check your super

It’s a no-brainer that pre-retirement is a time to take a very close look at your super. Talk to your fund about the different options for using your super when you retire. Many offer reasonably priced financial advice services.

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.

5 Retire full-time or ease into it?

We can’t normally access our super until reaching preservation age. That’s between 55 and 60 depending on when you were born. 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. 

Effie Zahos is an independent Director of InvestSMART, money commentator at Canstar.com.au and Channel 9 Today Show.

For more information on saving for retirment please click here