Retirement requires a certain amount of financial planning. Initially you will have to work out how much money you will need to support your retirement lifestyle (see Retirement Plans): this will give you an idea of your expected retirement outgoings. Next you will need to calculate your retirement income, that is, how much money you can expect to have coming in when you have retired.
Every super fund that you have paid into ought to send you a forecast of your future retirement benefits: these estimates give a good indication of how much monthly or annual income your super will provide. Many super fund providers will send forecasts out automatically, but if not then they can be requested; forecasts are available for all suer funds, including the Government Pension. Often these forecasts will be given in today’s money; this means that you might have an estimated monthly benefit of $100 in today’s money (the current buying power of money) so, although you might eventually be getting $150 each month, this will have the equivalent buying power of $100 today. This enables you to work out how much your future super benefits will actually buy you. Many super fund providers send out ‘combined forecasts’, that is, forecasts which indicate your estimated super benefits from both their scheme and your estimated Government Pension. In this case make sure you do not count your Government Pension benefits two or three times! These forecasts are only estimates of your future benefits, but they should give you a reasonable indication of what to expect.
Alongside your super forecasts, collect together any documents detailing long-term savings, investments and any other assets such as property. These are all assets that could provide you with non-pension income when you retire, perhaps from interest earned or from investment returns. When it comes to property, consider carefully what your home is really worth: for how much do homes in your area usually sell? Is property in your area rising or falling in value? You might be able to use the value of your home at a later date to gain some extra funds from an equity release company. If on the other hand you intend to sell your current property to partially finance your retirement, consider when you would realistically be willing to sell your home, how much you would receive from the sale after estate agent’s fees, and how much you would have to pay for new accommodation.
It is worth doing the research to see if you will be entitled to any extra benefits, including means-tested benefits if you have a low income. You might be entitled to housing or council tax, discount or rebate or carer benefits, depending on your circumstances. The means-tested benefit that many people are entitled to in retirement is Pension Credit. Pension Credit is an extra income benefit divided into two parts: guarantee and savings credit. If you have a low income, the guarantee credit will top-up your pension in line with the government’s ‘minimum guarantee’, that is, the minimum amount of money that the government has deemed reasonable for pensioners to live on. If you have a low income but you have saved for your retirement through a superannuation fund you may be entitled to an additional superannuation contribution, which rewards your saving by paying you up to an extra $500 per year as part of the governments low income super contribution (LISC). For more information on this benefit and others see Low Income Super Contribution and Pensions and other benefits.
If you are married or have a partner, discuss your estimated income together and make sure you are both familiar with each other’s pension policies and all other sources of joint income. In addition, it is advisable to read through the pension policy small print to see what happens in the event of death. Some pension schemes will pay a percentage of the pension to the surviving partner, others will pay out to a spouse but not to a child, and other pensions will die with the policy holder.
Double check that your estimated retirement income is adjusted for inflation. Inflation is the term given to the inexorable rise of prices, which will mean that your savings can buy you less in the future because the buying power of every pound will be reduced over time as prices increase. Inflation generally rises by two to three percent each year. This means that in thirty years, prices could be between sixty and ninety percent higher and thus in thirty years $100 will buy you sixty to ninety percent less than it would now. Any retirement forecasts which give estimates in today’s money have already been adjusted for inflation.
Remember that you will have to pay tax on your retirement income, including private pensions, interest on savings and your Government Pension. If your total retirement income falls below the income limit set by the government, you will not have to pay any tax on your retirement income. If you earn more than this limit, you will have to pay taxes on the excess. There are some tax-offsets on income available to you that you will not have to pay tax on. So make sure that you take tax into account when calculating your retirement income.
If you find that your retirement income does not match up to your anticipated retirement outgoings, you will have to give some serious thought to how you will make up the difference: see Closing a Pension Gap. Remember however that you might not need a huge income when you are retired to support your lifestyle. If you are concerned about a lack of funds in later life, look at ways in which you could reduce your current spending and save more of your income.
For more information see:
> Super
> Retiring
> Tax Help
