Worst ever retirement mistake to make, and how to avoid it

There are many so-called experts who will tell you the shortcut to retirement bliss – avoid them at all costs. There are no shortcuts and there is no sustainable bliss. So, here is the unvarnished truth about the single most important thing that you can do to increase your chances of a happy retirement.

You’ve seen the advertisements and they promise a lot, while making it sound so simple; give up your day job, trust me/us with your money and the income will flow. Whether the strategy involves day trading, self-managed super funds, or managed funds, the promises are huge. But it’s critical to take a step back and consider what’s really important. And what you can actually do to improve your retirement outlook, by avoiding the single greatest error in retirement planning.

Research shows that most people do not have ridiculously high retirement aspirations – the idea of ‘retiring rich’ is appealing, but unlikely. Most of us hope to maintain a similar standard of living in retirement as in our working years. However, the main factor which prevents us from managing our money, expectations and the eventual outcome is ignorance. Yes, the single greatest barrier to retirement happiness is your ignorance of your own situation and the consequent inability to make wise decisions based on facts, rather than fantasies.

A bit harsh?

Not according to research, which continually reveals the ‘she’ll be right’ attitude most of us have regarding the fundamental needs of later life. Now this is not to criticise the many retirees who have scrimped, and saved to fund themselves, sometimes with Age Pension support. My mother is one such retiree and a great example to our family. But sadly, this example is not as widespread as it could be, so there is a lot to learn from old-style retirement planning.

So, what is this ignorance and how can it be avoided? While, it is related to financial matters, that’s not the whole story. Here are five manifestations of retirement ignorance and some questions, which may give you food for thought, and prompt you to change old habits.

1. Asset ignorance
First up, do you know, without recourse to your bank, super and other financial statements, your net worth today? And do you know your net worth, excluding your property (if you are lucky enough to own a residence)? Are you aware of your total indebtedness (again without checking the bank statement) and how much this costs you on a monthly basis? How about your credit card? What is the balance? Do you pay it off on time, or is a monthly interest charge the norm? How much superannuation do you have and how is it invested? How long will it last once you start to draw an income stream?

If you know the answers to all the above, you are in the minority.

2. Spending ignorance
How much do you spend on a daily, weekly, monthly basis? How do you record this? Or don’t you bother? Perhaps the greatest failing of most people who worry about their future retirement income is that they are ignorant of their actual cost of living now. They just don’t wish to think about it, as they suspect they spend too much and it’s simply too uncomfortable to contemplate this. The most liberating thing anyone in this situation can do is to simply write down, every day for four weeks, what they have spent, add in the usual recurring expenses (power, telecom, motor, household outgoings, etc.) and review these costs, rating them either essential, discretionary or frivolous.and the next step is to work on reducing the latter two. Until any of us know what we spend, how can we ever feel comfortable that we have our retirement finances covered?

3. Entitlement ignorance
There are many government entitlements available for older Australians, from state-based Seniors’ Cards, to energy supplements, in-home aged care and pension concession cards that offer reduced utilities, rates, rego and medicines on the PBS. Understanding which entitlements apply to you is critical to maximising your retirement income and independence. In particular, the assets and income tests associated with the Age Pension are ‘must-knows’ for all retirees and pre-retirees. It’s not enough to rely on a financial advisor to explain the rules – you really do need to try to understand them yourself in order to test your advisor’s recommendations. ‘Buyer beware’ remains the golden rule for any advice that encourages you to purchase a product, financial or otherwise. Ignorance of the rules is a poor defence when things go pear-shaped, as they often do – remember the Storm Financial debacle?

4. Accommodation ignorance
If you live in a home which is fully paid off, you have the major pillar of retirement independence sorted. However, many Australians are not in this position. Some still have high mortgages and some are renting. There are many ways of utilising the asset of the family home, including reverse mortgages, equity release products and downsizing. Understanding how such arrangements work alongside the Age Pension, and any private savings or superannuation, is very complex. But this is a critical equation that will enable you to accurately plan long-term income.

5. Relationship ignorance
This will seem an odd fifth factor in the fight against ignorance, but it’s possibly the most important of all. If you are in relationship and entering, or living in, retirement, it’s likely you will be seeing a whole lot more of your partner than before. It’s a long day if one or both of you are unhappy, particularly with each other. And often the root cause of such unhappiness is differing expectations of life in retirement. This is because you failed to sit down and ask each other what life would look like, how you would fill your days, which goals you hoped to achieve, how much money you would spend and on what, which sacrifices you would make and how large a part grandchildren might play in your new lives. Long-term relationships are based on compromise and this can be far from successful if you have no idea what the other half wants. So make sure this is the first conversation you have.

What about you? How do you rate on the five-part retirement ignorance scale? Or do you feel there are other more important things we often overlook?

Written by Kaye Fallick

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