Common Mistakes of Retirees – Plan To Avoid Them

Here Are Some Steps To Help You, Young or Old!

If you are young, read this as if you are about to retire. We will give you some tips now before it is too late and panic sets in so that you can avoid the pension in the future. Remember, most believe that Superannuation won’t provide the retirement income you will need and will only provide an income for around five years, after you have worked all of your life putting 10% of your pay into Super each week!

You Define What You Want to Do

Before retirement, it is wise to work out what you want to do.  Some people plan to take up new hobbies such as golf or tennis. Many use this time to travel and see the world. You may decide to spend the wintertime in a warmer climate either by renting or purchasing a vacation home.

Once you decide what you want to do during retirement, it is necessary to define, prioritize and quantify it in terms of money. For example, if you want to spend $50,000 a year on travel, yet only have $600,000 in total assets, this would not be a wise decision.  Another step is to prioritize your goals by arranging them in the order from what is most desirable to least desirable.

This should help you determine which goals are more important for you to achieve. Once you define and quantify what you want to do in retirement, this is a sign you are ready and should help you determine how much extra money you need to allocate.

Have you Established a Budget

One of the most common mistakes retirees make is understating their needed income during retirement. It used to be a rule of thumb to use 60-80% of your current working income as your expected retirement income. However, this can cause a variety of issues, and the number one reason why retirees run out of money during retirement is because of poor budgeting skills. Look at your current budget. Determine your monthly expenses and decide if they are going to increase, decrease or stay the same during retirement.

Many retirees make the mistake of assuming expenses go down. However, if you decide to buy a second vacation home, or a new car this adds an additional monthly mortgage payment, along with taxes, utilities, association fees and general maintenance. Once you determine exactly what you want to do during retirement, you can decide if it fits into your budget.

Factor in that this amount will grow at an inflationary rate of 3-4% per year.  Even though this may seem high, it is much better to be conservative over the long run.  Overestimating inflation only leads to having more assets left to your heirs instead of having a chance of running out of money. To illustrate the effects of inflation, a $50,000 retirement income stream would need $67,195 in 10 years. The same $50,000 would need $90,305 after 20 years**. Inflation is one of the biggest risks that retirees face during the latter half of their lives,** so it is extremely important to plan for it ahead of time.  In 1973 the average property was $18,000.  Twenty years later the same property was worth $135,000.  That’s why I love property – inflation proof!

Do you Have Enough Money

When most people begin planning for retirement, the income-planning segment is a common place to start. However, you should start with quantifying exactly how much is needed on an expense basis. The first step is to determine how much your stable income streams are going to pay. These include any pensions and investments.

Once both amounts and the timing of these income streams are determined, you can decide how much to withdraw from savings. As a rule of thumb, most retirees should take a maximum of 3-4% from a portfolio. Anything above this rate significantly increases the risk of depleting funds early. For example, for a nest egg totalling $1 million, the total withdrawal rate should not exceed $40,000pa.

If the money remains in a non-interest bearing account and the withdrawal rate increases by 3% inflation each year, the $1 million would last just over 19 years. Increasing the withdrawal rate by 1% reduces that same timeline by three years and the $1 million will last only 16 years.  But from previous, you know in twenty years to spend $40,000 in today’s money will only buy you $20,000 of value then but prices would have moved on to be $80,000.  This is called inflation.  It’s why so many retired pensioners are in poverty.  “Learn from others’ mistakes or you are destined to repeat them”.

This also demonstrates the importance of investing, as inflation erodes the longevity of your retirement portfolio. When entering retirement, you should have a healthy blend of income-producing and growth investments. Although it may seem logical at first to generate the 3-4% from fixed income, inflation eventually affects the total performance. Due to advances in health care, the average person could spend almost 25-30 years in retirement. This is considered a long-term investment horizon that warrants investing in some growth investments.

Next week we will do a case study of Mr & Mrs “I like Property” and Mr & Mrs “I like Cash and Shares”.  We will simply put them back in time with the desired retirement pot of gold and see how they perform after twenty years.  Should be interesting!

Have you developed a Retirement Plan

If you have all four signs completed above, you should be comfortable in knowing you have taken great steps in securing a successful retirement lifestyle. However, both life and retirement constantly change. Markets move up and down. Unforeseen events occur for which you cannot plan. This is why it is important to have ongoing monitoring and adjustments made to a retirement plan.

These adjustments could be made to withdrawal rates, risk tolerance of investments or even having to give up on a retirement goal. Either way, it is very necessary to continually monitor and adjust a retirement plan over the rest of your life.

Summary

This may sound very complicated but your Property Mentor can assist you with any questions at no cost to you. They can simplify this process with our exclusive software called FIDO (Financial Independence Date Organiser).  Whether you are 18 or 88 you need this program. Remember 98% of Australians leave it too late to plan their retirement. Ninety-five percent of people retire either needing the pension immediately or after five years when their Super is exhausted.

The missing 3% are self-funded retirees but not at the level they had planned. It appears to me the reason for the latter is that they don’t regularly go back and check their plan. We solve this problem for you by encouraging you every six months to go back and get a new FIDO done.

There are many resources available regarding retirement planning, but it is always recommended to regularly meet with a financial adviser and your Property Mentor to make sure you are taking the correct path for your retirement.

I love property! Happy Investing!

Regards,

Kevin Young Founder of Property Club

Remember: We make more millionaires than all the others combined!