If you need a solid plan for retirement, this guide will help you build it out with confidence.
While some people might find retirement planning overwhelming, it doesn't have to be. We've spent many years helping our members build the right retirement strategies, so we've designed this step-by-step guide to help you learn the essential elements of creating a solid retirement plan
Let's dive in and learn how to transform your retirement dreams into a reality.
When Should I Start Planning for Retirement?
Let's get our most common retirement planning question out of the way: "When should I start planning for retirement?" Realistically, you want to start as early as possible.
Ideally that start date could be today, recognising that everyone has their own set of focuses and challenges. While there's never a fixed time to start, we also need to fight the urge to delay retirement planning. At a bare minimum, retirement planning should be firmly in your sights from Age 55, and ideally from Age 50.
The important thing to understand is that time is of the essence when planning for retirement, and the options available if you start in five years' time, may be far thinner than if you start now. The sooner you begin, the more control you'll have over your financial future.
Let's move to the practical steps that you may need to commence the retirement planning process.
To pick up more on retirement planning, check out this episode of the Australian Retirement Podcast:
A 7-Step Guide to Planning for Retirement
At Northeast, we've designed a process which has helped many of our members get ahead and effectively build wealth for their later years. Here are the steps you should follow to have a comprehensive, realistic, and effective plan for retirement.
1. Define your retirement goals
You can't set a course without knowing where you want to go, so we encourage that everyone starts by envisioning their ideal retirement. This step should help you to set realistic goals which fit your lifestyle and priorities. What are you looking to achieve with retirement? What lifestyle do you want?
When defining your retirement goals, some things you should consider:
- Your desired standard of living
- The activities you wish to pursue (e.g. your travel plans, hobbies)
- Where you see yourself living and how this may change over time
- Additional financial expenses you may incur (e.g. supporting your kids' education, weddings etc)
Taking the time to properly outline your life after retirement will help you to understand your likely costs, and can also be a very inspiring process! If you have a partner, we highly recommend you including them in this process as your retirement goals are likely to differ.
2. Work out your living costs
You'll always be spending money. Even when we stop working or earning, we continue incurring costs to keep the lights on, pay the food bills, and (hopefully) pursue our passions and interests. To better manage your post-retirement expenses, you'll need to know what you'll likely spend money on during this stage of your life.
Many people get trapped at this stage as it can feel a little overwhelming trying to estimate what your costs are, especially long in the future. Our experience is that your current expenses are likely to offer a lot of clues as to what your retirement costs will be. This is because people grow accustomed to their lifestyles and don't like to compromise upon retirement.
Your costs will no doubt look different from today, for instance, groceries and housing costs may decrease as dependents move out, whereas your holiday and perhaps sporting / hobby-related expenses may increase.
A good budget planner can be a huge help in anticipating your expenses in the future, as you're able to evaluate each cost line-by-line and decide on how it may change in your retirement years. If you'd like to get download our comprehensive budget planner, you can do so by clicking here.
3. Adjust for inflation
Now that you have outlined your expenses, we need to consider how inflation is likely to affect these numbers. Not factoring inflation may result in you significantly underestimating your cashflow needs.
Inflation has a huge hidden impact on your spending power - consider that $100 went much further 10 years ago, than it does today.
Fortunately, it's very easy to adjust your expenses for the effects of inflation. We recommend a simple online CPI Inflation Calculator like this one. Simply include your budget's total expenses in the 'Amount' field, select the current year as the 'Start year', and adjust the 'End year' to the year you're likely to retire. We recommend 3.00% to be used as the 'Future rate' - noting it's likely to be a little lower over the long-term.
If you do this correctly you should see a new figure which is higher - and sometimes significantly higher - than your current budget. For example, a $50,000 retirement budget in 2024, is increased to $80,235 in 2040.
4. Determine your capital needs
Now you've got a clear sense for your adjusted expenses, we need to assess our capacity to meet these ongoing costs.
As a simple rule, we suggest that you multiply your inflation-adjusted expenses by 15* to identify your capital needs. This figure represents the value of assets you'll need in retirement to meet your ongoing expenses.
For example, if you have inflation-adjusted annual expenses of $80,000, you'll need $1,200,000 ($80,000 x 15) of investment assets. We note that these investment assets should exclude your family home.
*We note that if your expenses and assets are low e.g. below $60,000pa, you may be able to reduce this multiple down to 8 - 10. This is because you're likely to have a higher proportion of your retirement funded by the Age Pension. We recommend that you speak with a financial advisor to understand your specific multiple.
Now you've identified your capital needs in retirement, we need to start thinking about how we're likely to get there.
5. Review your existing assets and liabilities
Tally the value of all of your investment assets today - including superannuation, investment properties, shares, and any large sums of savings. We don't recommend that you include offset / redraw balances as these are effectively being used to clear your existing debts.
Speaking of debts, subtract these from your current investment asset value to identify your net asset position. As we have excluded the family home from this calculation, you can also exclude your home loan - but only if you're confident that this loan should be cleared by your retirement date. If this is unlikely, i.e. you may be A60 with a large home loan, then this loan would need to be included as you'll ideally be paying it down as you enter retirement.
Hopefully your net asset position is a healthy number which indicates that you're well on the way to achieving your capital needs at retirement. If this figure is still a long way from your capital needs, it may be worth sitting with a financial advisor to understand what can be done to strengthen your financial position - and especially if you're getting closer to retirement.
5. Develop a financial plan to close the gap
In most cases you're going to have a gap between your current net asset position, and your capital needs in retirement.
This is an area where specialist advice can be highly regarded as the specific actions you need to take will be dependent on your own unique situation, risk profile and personal goals. If you wish to do this yourself, your financial plan should address the following items:
- Review and optimisation of your existing investment assets including your superannuation
- The ideal composition of investment assets to help you to bridge this gap
- Managing any debt you'll need to fund these investments
- How your expenses are likely to change as you approach retirement (e.g. you may clear your mortgage beforehand or stop paying school fees for your children)
- Any major expenses you're likely to incur in the lead-up to retirement
- Your likely income sources when you retire (how will your proposed assets fund your ongoing expenses when you stop working)?
You'll also need to regularly review and adjust this plan to stay on track and accommodate any changes in your circumstances.
If you need help creating a retirement strategy, you may really benefit from a conversation with a financial planner. Our financial advisors at Northeast Wealth are ready and willing to help you create a solid strategy. Talk to us without commitment or cost by booking a free consultation here.
7. Monitor and Adjust Your Plan
Retirement planning isn't a "set it and forget it" process. Your life circumstances, economic conditions, and individual priorities will change over time, and that will call for adjustments.
Keep track of your financial position each year, including your annual income, superannuation balances, net asset position and overall investment performance. You'll also need to adjust your plan according to changes in life, job change, inheritance, serious health condition, etc.
You may also need to stay updated with the tax laws, superannuation rules, and economic outlooks which may affect your retirement plan. Again, this is an area where professional advice can be extremely valuable so please get in touch if you'd like us to conduct a review of your existing financial plan and trajectory.
Seek Professional Guidance
Although this is not a 'step' in the above process, professional guidance can be invaluable when you start diving into the details of your retirement plan. A financial advisor can help you build a solid strategy. They can also help you avoid costly mistakes that could set you back.
Moreover, a financial advisor can optimise your investment strategy so grow your income and manage risks effectively. They can help you decide when to access your superannuation, how to handle lump sum payments, and make the most of tax offsets and deductions, among many others.
Additionally, advisors can keep you informed about changes in super fund regulations, tax rules, and other factors that may impact your retirement plan. If you need a financial planner to walk you through all these and more, we're more than eager to help you with your retirement journey.
Pitfalls of Retirement Planning and How to Avoid Them
The seven steps above should help you get started. But along the way, you might find yourself stuck in one pitfall or two. Recognising these pitfalls will make you more proactive and ready.
What pitfalls should you avoid? These are the three most common retirement planning mistakes:
1. Underestimating Costs
Many retirees miscalculate the amount they’ll need to maintain their desired lifestyle. Some expenses commonly overlooked are healthcare, travel, health insurance, and supporting family.
Start with a detailed budget that includes your daily living expenses and anticipated medical costs, travel plans, and contingencies for unexpected events. You can use tools like our budget planner or consult a financial advisor if you want to create a realistic estimate tailored to your lifestyle and goals.
2. Failing to Account for Inflation
Inflation gradually erodes the purchasing power of your savings, which can make a significant difference over the course of 20–30 years of retirement. An annual expenses figure which seems adequate today may fall well short in the future if inflation is not factored into your planning.
This can be negated by following the above steps, as well as investing in 'growth assets' such as property and shares, which historically provide growth to offset inflation. You should also be regularly reviewing and adjusting your retirement plan to account for major changes to CPI and other economic conditions.
3. Failing to Diversify Revenue Streams
Relying solely on one source of income tends to leave retirees vulnerable to changes in policies, market downturns, or unexpected disruptions.
We recommend that you build a diversified portfolio of income streams. If possible, consider a side businesses to boost your wealth. If you're unable to focus on this, you can diversify your income streams within your investments by allocating money to a diversified range of bonds, shares, and other assets. Diversification tends to spread your risk while also providing greater flexibility to adapt to life’s uncertainties.
Frequently Asked Questions
How early should I plan for retirement?
The sooner the better. Starting in your thirties or forties puts you in a strong position to take advantage of compound interest. But keep in mind that it's never too late. So if you're way past those years but you're eager to have an effective retirement plan, the most important thing is to get started.
How long will $500,000 last in retirement in Australia?
This will depend on your retirement expenses - as outlined earlier it may last many years if you are eligible for Age Pension and have low ongoing expenses. But our numbers indicate that a couple is likely to be able to fund a comfortable retirement for around twelve years with a balance of $500,000.
Recommended Reading: How Much Do I Need to Retire in Australia? A Full Guide
What's the 5% rule in retirement planning?
The 5% rule is a widely referenced guideline in retirement planning that suggests withdrawing 5% of your retirement savings annually. This approach is designed to ensure that you will not run out of funds in your retirement.
The idea is that by withdrawing this percentage, you can maintain a regular income without depleting your overall balances.
But you should note that this rule doesn't account for every individual's unique financial situation or market conditions. Economic fluctuations, inflation, and changes in spending habits can all impact the the 5% rule's effectiveness.
Consider factors such as life expectancy, health care costs, and other personal circumstances when applying the 5% rule to your retirement plan.
What is Age Pension?
The Australian Age Pension is a regular payment from the Australian government that supports retirement. To be eligible, you must:
- Be at least 67 years old, depending on your date of birth
- Be an Australian resident for at least 10 years
- Pass an income test and an assets test
The amount of Age Pension you receive depends on your income and assets:
- Income test: The government assesses your income
- Assets test: The government assesses the value of your assets, including your super, investments, cars, and business assets. The limit for the value of your assets depends on whether you're single or part of a couple, and whether you're a homeowner.
What is Preservation Age?
In Australia, 'Preservation Age' is the minimum age at which a person can access their superannuation benefits. Currently, that age is currently set at 60 years old for most people born after 30 June 1964.
This means you can't access your super until you reach this age, unless under specific circumstances like permanent retirement or severe financial hardship. For early retirement strategies and how they might affect your government benefits and so on, check out this guide next.
What are the different stages of retirement?
Retirement is sometimes divided into phases, each with unique financial and lifestyle needs. Anticipating what lies ahead at retirement age will prepare you to achieve the best possible results when moving towards a good retirement - active, healthy, and financially sound.
1. Golden Years
The Golden Years are the most active and interesting years of retirement. These years are often filled with a desire for recreation, staying active, and enjoying new experiences, usually within the first 5 to 15 years of retirement.
These years are the best for travel, hobbies, and spending quality time with family. It's also when your spending peaks, and therefore costs for leisure and activity might be higher. The best way to enjoy this phase without financial worry is to plan ahead.
2. Silver Years
The Silver Years are more relaxed and home focused. Travel may become less frequent, with retirees favouring domestic trips or local events. Health considerations might start influencing daily life.
During this time, you’ll likely prioritise comfort and stability, spending less on activities but potentially more on health-related benefits and costs. This is also the time where you most likely want to take advantage of your Commonwealth Seniors Health Card.
3. Legacy Years
The Legacy Years bring a shift to health and care as the primary focus. Mobility and independence may decrease, and expenses related to access to aged care, medical treatments, or assisted living often rise significantly.
Financial security and the status of your retirement income is important at this stage to allow your needs to be met without burdening your family. Many also spend the time reflecting on their legacy, estate planning, and contributing toward meaningful things such as loved ones or charities.
Understanding these stages can help you plan for how to allocate your resources during your active years, transition easily into quieter times, and confidently manage later-life expenses. It's thoughtful planning that gives you the freedom and security to make the most of each aspect of retirement.
Final Thoughts
Retirement planning is key to designing the life you want once you leave work. Yes, savings and investments are important. But more importantly, you should have a carefully crafted retirement strategy that allows you to pursue your dreams while still remaining financially secure.
Feel free to consult our trustworthy financial planners for practical advice and continuing assistance. With a clear vision and a sound strategy, you can have a rewarding retirement.
James O’Reilly is the Director of Northeast, a fast-growing financial advice firm that empowers clients to achieve meaningful financial progress and well-being. He's also the co-host of the Australian Retirement Podcast, one of Australia's fastest-growing podcasts.