The way people see retirement has changed over the years. It’s no longer the stereotypical transition from working one day to stopping the next. Indeed, for many, it’s very much a second life – the time to enjoy doing things they couldn’t because they were too busy working and raising a family.
If you’re planning to retire in 2021, here are seven simple steps you can take which will give you the best possible chance of enjoying retirement when you finally decide to stop work.
1. Make sure you have a plan in place
If you haven’t done so already, now is the time to put together a plan for your retirement.
This should include:
- The sort of things you want to do once you finish work
- When you want to do them
- The commitments you have
- The super fund and other savings you have available to fund your retirement.
You should also include a list of all your regular monthly outgoings, as well as noting any anticipated big future expenditure.
This will give you a good idea of how much income you’ll need, whether you still need to be saving, and if you need to make any changes to your lifestyle.
Remember you can update your plan as you go through retirement.
2. Make sure you’re invested wisely
If anything, your investment strategy becomes far more important after you retire than while you’ve been working.
Remember that once you stop working, what you have accrued will need to last for the rest of your life, and you potentially won’t add any further contributions to it.
So, you’ll need a sensible long-term investment strategy as you start to withdraw from your fund.
You’ll need to strike the right investment balance. If you’re too cautious you may find you don’t generate enough growth, which could mean your retirement savings not lasting through your lifetime. But taking too many risks could mean you suffer big losses which could be difficult to make up.
By making sure your fund is well-diversified, you can help reduce investment volatility and avoid excessive upheaval during periods of market uncertainty.
3. Try to clear any outstanding debts
You should make sure you are as debt-free as possible when you retire.
It’s likely you’ll earn less in retirement than you do while working, so credit card and personal loan repayments will make a real dent in your disposable income each month.
So, you should make a conscious effort to reduce debt as much you can before finally retiring. Try to put together a plan, and stick to it, focusing on the high interest debt first.
4. Consider the markets
The Covid-19 pandemic created turmoil in the markets.
The ASX200 lost 36% of its value in the space of just over a month, falling from a 2020 high point of 7,162 on 20 February to 4,546 on 23 March. The Dow Jones suffered a similar fall, dropping 30% in the same period.
However, history shows us markets are cyclical and after a fall there’s usually a rise. So, the ASX200 has recovered much of the ground it lost, and the Dow Jones recently reached a record level of more than 30,000. Many other markets around the world have followed a similar path.
The challenge for anyone approaching retirement is what to do in the event of such a sudden downturn in the run up to their retirement date.
It’s worth keeping checks on the market and have regular reviews with your financial planner. But it’s important to avoid the temptation to react to every market movement.
Remember the old adage: ‘it’s time in the markets, not timing the markets.’
5. Check you have an emergency fund
Regardless of how your pension fund is invested, sometimes stock market turmoil can impact on all investments – even if it’s only for a short period.
Taking income from your super after a market fall can mean you cash in more investment units. You may then miss out on future growth when markets recover.
One way to avoid this is to have an emergency cash reserve to provide you with an income for a short period while you wait for markets to stabilise. A very rough rule of thumb is to try to have three months’ income in cash as an emergency fund. This means you won’t be forced to sell assets at a time when their value is reduced, just to fund your income.
6. Consider if you want to transition to retirement (TTR)
It may sound contradictory in an article about things you should do in the year before retirement, but it’s worth spending some time deciding whether you actually do want to stop work totally.
Many people now enjoy a ‘phased’ retirement, where they might work part-time and reduce their working hours. Alternatively, they might leave their main job and start working on a consultancy basis. Often, our clients find that winding down gradually is better than switching off suddenly.
You could also consider a transition to retirement (TTR) strategy, where you can access some of your super and keep working. This will enable you to reduce your working hours without reducing your income.
If you’re aged over 60, the money you receive from a TTR pension can be tax free. You’ll also continue to make super contributions, so you’ll be able to replace at least some of the fund you withdraw from your super for TTR.
However, don’t forget by setting up a TTR and drawing from your super early, you’ll potentially reduce your income after you retire.
7. Above all, take your time
The government has given retirees a helping hand during the current pandemic and reduced the minimum pension drawdown rates for retirees. But this is unlikely to be the case in every market downturn.
So, you should take your time and ensure you’re fully happy with your plans and be confident your financial position is robust enough to deal with any unexpected events.
You should make sure you have an easily accessible cash fund in the event of sudden market downturn, together with a diverse long-term investment portfolio. Regularly reviewed with the support of a financial adviser, this should enable you to enjoy a long and happy retirement.
At bdhSterling, we have a wealth of experience in helping our clients plan for retirement.
We can help you put together a bespoke investment strategy tailored to meet your individual needs, and offer guidance on issues such as TTR and tax planning.
Please get in touch to discuss how we might be able to help you.