Goals and Objectives in your Fifties
Throughout the decades leading to retirement, the primary emphasis should be on having a written plan, first and foremost, based on agreed objectives and goals. This is the decade when having a plan ceases to be optional and becomes an absolute requirement - including, we believe, the involvement of an appropriately experienced financial planner.
Some specific issues to consider in your planning:
Timing - Not so fast?
When precisely you intend to retire is obviously a significant factor in terms of calculating the assets required to support your retirement. The longer you defer retirement the smaller the asset base required to support your retirement or the higher the annual income you can enjoy while in retirement. The number one rule should be, "don't be in a hurry", unless there are health or other factors beyond your control.
If possible, rather than retire abruptly, consider reducing your working hours gradually over time - this is particularly true if you continue to enjoy your work. We are not fans of the "stop work one day, play golf thereafter" approach - many people are woefully unprepared for retirement. Bear in mind that you may be able to access a Transition to Retirement Pension to offset any income reduction.
Think about how much you need for your retirement
This is a complex issue, and we have addressed this issue in more detail elsewhere. We take the view that most people should aim to generate an income for retirement that is about 60% - 65% of their pre-retirement income. There are a number of calculators available, including one provided by ASFA (The Association of Superannuation Funds of Australia), which basically generate estimates of what assets are then required to support this income.
Apart from the difficulty in estimating longevity, one current issue is whether the average investment earnings used by the various calculators remain viable in a world experiencing historically low interest rates? If not, and we are entering a long period of significantly lower average returns, then the asset base needed to support superannuation may need to be higher than was previously the case.
You also need to consider to what degree you intend to run down your asset base during retirement. Some financial planners will trumpet the 5% rule - a rule of thumb which suggests that your sustainable annual income should be no more than 5% of your super balance. This means you will basically maintain your capital throughout your retirement - in nominal rather than real terms, as inflation will eat away at the real value of the capital.
Unless you have extreme longevity in the family or a significant asset base, we don't believe that approach is viable, and that retirees should factor in some return of capital - even if not the entire amount available.
Maximising Contributions - Salary Sacrifice
Now is the time to focus on maximising your superannuation contributions, and particularly concessional contribution limits as they can't currently be carried forward into future financial years - although some flexibility now exists if your super balance is less than $500,000.
The "right" Investment Mix
Again, you need to review your investment mix and consider whether you need to start de-risking your portfolio and move away from aggressively invested growth options. If retirement beckons in the short to medium term you should be particularly looking to build a sustainable portfolio with perhaps a emphasis on greater income and reduced volatility/risk. However, moving away entirely from an exposure to growth assets entirely or too early can be very expensive, and in the recent Productivity Commission report on Superannuation there was criticism of so-called "life-cycle products" which automatically re-orient a members portfolio to defensive assets in the pre-retirement phase.
Additionally, particularly if you are in a pension phase, your investments need to be aligned with your liquidity requirements - you need to ensure you have sufficient accessible funds to see yourself through a major market correction or crisis, without the need to sell "good assets at poor prices".
In this context, unless your situation is unusual, we do not recommend a movement away from all growth investments - some retention of these assets is going to be required during a retirement that could last more than 30 years, if you are graced with a long life. We are supporters of the "buckets" approach to managing retirement income and assets - which balances the need for liquidity and a continuing exposure to growth assets.
Candidate for a Transition to Retirement (TTR) Pension?
Once you hit preservation age (now 57+ for most people) you can draw down a pension from your super even if you are still working. Your funds are transferred into a super pension and you can withdraw between 4% and 10% of your pension account balance each financial year. There is no option to withdraw money as a lump sum.
Although from July 1, 2017 the investment returns on the super pension account supporting the TTR pension have been subject to tax, when you turn 60 you won't pay any income tax at all on your pension income. If you are under age 60 you will receive a tax rebate on your pension income.
While most super funds offer a TTR option, don't presume that is the case and make appropriate inquiries.
Redundancy or health risk - maintaining an "emergency fund"
You will often hear advice to the effect that should aim to build up an emergency fund containing 2- 3 months worth of expenses, perhaps more if you or your spouse are self employed or your income is more volatile. Again, the right amount depends very much on your personal circumstances, including insurance cover for health issues, but we are going to suggest an emergency fund equivalent to 4-6 months worth of expenses in your 50's and prior to retirement.
There is a cost to keeping cash, but many well qualified people experience very significant problems obtaining employment in their 50's. Ageism is well and truly a fact of life in the Australian labour market and while it is important that someone should find work quickly, you shouldn't be looking for work under "crisis conditions".
Winding down Life Insurance
At this stage, if your children have (become independent and you have substantially reduced or eliminated your debt, then you should be looking to reduce your life insurance cover. Apart from being unnecessary, insurance cover becomes very more expensive as you age. One of the downsides of insurance cover provided within super funds is the cost is often not as obvious as premiums paid directly to insurers.
Review your Will and Superannuation Nominations
If you haven't done so already, see a solicitor to have a will professionally prepared. Otherwise, regularly review the provisions in your will to ensure that they are appropriate and, particularly if you have substantial assets, that the will is tax effective both in terms of the estate and beneficiaries.
Remember that superannuation is not treated in the same way as the rest of your estate. If you want to ensure that someone in particular will receive all or part of your superannuation should you die then you need to make sure you set up a binding nomination. This will ordinarily need to be updated every three years for it to remain valid and be aware that super payments made to individuals not considered "dependants" may attract significant levels of tax.