Sometimes, facing up to the worst possible scenario makes the right choices very clear.
When it comes to financial planning, add a dollop of wishful thinking to a dash of wilful ignorance, and you’re well on the road to ruin.
In that spirit, we offer you a step-by-step guide to penury, in order to ensure you make the right choices now and in the future.
1. Don’t plan
First, just wander along without considering how much income you’ll need in retirement. Prudent citizens instead do the following:
- work out the age at which they will retire
- estimate their life expectancy and how long they’ll need an income
- define retirement. Will they work part-time?
- calculate monthly expenses in retirement
- plan to fill the gap between the money they’ll need and the money they have
- make a spending plan for the fun things, like shopping and travel
- engage an accountant or financial planner to tackle tax planning.
YourLifeChoices estimates that for a couple to live an ‘affluent’ lifestyle in retirement, they would spend $1470 per week and a ‘constrained’ couple would spend $847 per week.
2. Live it up and don’t save
Next, you must spend, spend, spend, and stop stressing about bills. The smarty-pants folk, on the other hand, do this:
- aim to save 10 times their final salary in savings by the time they retire
- budget for two-thirds of pre-retirement expenses
- cut back on extra expenses such as fancy boats and cars
- examine recurring bills to save every month
- Save 15 per cent of income per year.
3. Take the pension as soon as possible
The pension safety net will take care of you, won’t it? Ah, no. The wise do this:
- take the pension as late as possible
- do not plan retirement around the pension
- make social security a supplement to personal savings.
(While you’re at it, leave work as soon as possible …)
4. Don’t pay off your home
Who needs a hedge against inflation and extra source of financial protection in retirement? She’ll be right. The affluent ensure they:
- make their home their safety net
- make sure they’re not paying in retirement
- pay the mortgage when they have an income, refinancing and making extra repayments.
5. Ignore your debts
Why bother paying off debt before retirement? That’s what well-off retirees do. They also:
- pay off credit card debt and personal loans first
- pay off home loans as quickly as possible so they pay less in interest when they’re retired
- install a debt reduction strategy for the remainder of their working span
6. Let your superannuation run itself
You think of super as an onerous subtraction from your immediate bottom line. The relaxed and comfortable think of it as a crucial cornerstone of their finances and do the following:
- work out the full amount of superannuation they need for retirement
- forecast potential retirement shortfalls by using tools like the MoneySmart retirement calculator
- develop a strategy to attack the shortfall, making extra super contributions, comparing super accounts to ensure the best return, setting up a high-interest savings account, or adding an extra investment.
7. Ignore health expenses
You think it’s negative and morbid to focus on bad health before it happens. Realistic, wealthy types instead factor it in. They also:
- adopt a healthier lifestyle. It’s good for their wellbeing, and their finances
- plan for big, long-term expenses. One person in every couple is likely to face an expensive ailment as an older person
- consider insurance which includes long-term care.
So, there you go: what to avoid in order to self-sabotage.
The well-off and smart lead comfortable retirements because they know how much they need and take measures to achieve it. If you crave disaster, ignore their example and do nothing.
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Financial disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.