Retirement risks you need to be aware of

Written on the 15 December 2022 by Parkside InvestorPlus

While early retirement is a goal for many, there are many factors that determine if this is possible.

In Australian, there is no such thing as a ‘retirement age’. 

Nor are there any laws that dictate when you can and must retire.

This means, you can retire when you want.

Having said this, statistics show that people, in general, choose to ‘retire’ between the ages of 62 and 65 – presumably to allow them to live a quality level of life while still being mobile and healthy for some time to come.

So, what determines when people choose to retire? 

Some key considerations include:

·       Your current level of superannuation (this is your starting point)

·       Do you own your home outright or is there still a mortgage attached to it

·       Are you an empty nester

·       Your lifestyle expectations – i.e. how much annual retirement income do you need – for a moderate, comfortable or luxurious lifestyle?

·       Your eligibility for the Age Pension and how much to top up your retirement income

Benjamin Franklin once said, “If You Fail to Plan, You Are Planning to Fail”

The retirement phase of your life is no different.

The problem is that many Australians approach retirement very much underprepared.

Statistics show that less than 45% of Australians, under the age of 40, feel they are prepared for retirement.

However, in our current (2022), changing economic landscape, there are many factors that fall way outside of our areas of control which will have significant affects on your retirement plans.

1.       Will you have enough money?

No doubt we’ve all now been educated about inflation.

If you are still unclear about inflation, essentially it refers to average price increases for goods and services over a period, typically a year.

How does inflation affect your quality of life in retirement?

Simply because you have a finite amount of money coming in every month and as the price of everyday goods and services goes up, this means your buying power has decreased.

For example, if one year ago your average grocery bill was $100, now it could be $120 (as an example only).

This additional cost is now eating into your retirement income stream.

The bottom line – rising inflation will impact you purchasing power – everything from groceries, utilities, and those overseas trips you’ve been planning on.

2.       The return on your savings (superannuation)

With rising inflation, the Reserve Bank of Australia is using interest rates as their weapon of choice to tame the beast that is inflation.

When interest rates were at historic lows, this had a very negative impact on retiree’s super funds, particularly those who chose to err on the side of safety by having the bulk, if not all, of the super in conservative income generating assets.

However, on the flip side, the result of increasing inflation and higher interest rates now means your superannuation funds are working harder.

The other side of the coin?

Simply increasing interest rates is not an instant solution to combat rising inflation.

Retirees who are heavily relying on fixed income investments such as bonds will face challenges as bond returns are unlikely to outpace inflation and hence yield positive real returns for some time.

3.       Living longer

If you’ve chosen to retire at the spritely age of 65, then chances are you will live for another 15+ years – specifically, if you are a male, you can expect to live for another 20 years and if you’re female, another 23 years.

And the impact of living longer in retirement?

1.       Will I have enough money in my retirement

2.       Health care

Health (age care) in the latter stages of retirement is often overlooked.

Health (age) care

As you get older, it can be more difficult to do those day-to-day things on your own.

For example, you may need help with cleaning, attending doctor’s appointments or even just moving about.

Aged care is the support provided to older people who need help in their own home or who can no longer live at home.

Examples of aged care includes;

·       Help with housework, shopping, cooking or just going out

·       Any assistance with mobility such as walking frames or motorised scooters

·       Modifications to the home to assist with mobility such as ramps, handrails or even stair lifts

·       Personal care – dressing, eating, bathing, going to the toilet

·       Health care – nursing, physio, and medical care

·       And of course, accommodation if living in your own home is no longer an option

Just from the list above, you start to understand that there are costs associated with each of these requirements.

It’s vitally important to ensure that the right amount of aged care costs have been factored into your later life financial planning.

Unfortunately, though, as we’ve seen from the critically low number of Australians who are financially prepared for aged care, the vast majority will fall short.

While these factors are largely out of your control, you can start the planning process to put in place plans and strategies to deal with these factors.

At Parkside InvestorPlus, we work closely with out clients to map out and plan for future events to minimise their impact on your retirement.

Additionally, we have a qualified specialist in aged care planning who will provide the right advice for your needs.

You can contact us or call us on (02) 9899 4899.