- December 31, 2017
- Posted by: Ethica Private Wealth
- Category: Blog
Wherever you may be on life’s path, retirement is in there somewhere along the way. Like most things in life, it is not something we are able to practice for ahead of time. There’s no preparation course and no manual on retirement, which means most people just “wing it” when they reach their retirement years since aging and retiring is basically a one-time occurrence.
With this in mind, preparation is essential – which is one of the reasons why you can find so much information out there on the subject. The hope is that more people will pay closer attention to the advice and information out there so they can better prepare for their “golden years”, because let’s face it – unlike other stages and things in life, you really only get one shot at an enjoyable retirement.
Successful planning should include possible pitfalls and challenges, such as expected and unexpected expenses, as well as some forecasts for possible changes in costs and prices. Unfortunately, planning to live in that beautiful, relaxing retirement community on the beach is not the most important part of planning for retirement.
A common issue that many retirees face is not being prepared for the unexpected or even the expected, causing some to give up their comfortable retirement lifestyle in order to accommodate additional expenses. What type of expenses should you be planning for? In this post, we’ll take a closer look at the 4 things you are probably not planning for.
Many people, including yourself, may have a well-funded retirement account, but does your plan have any holes in it? Meaning, has your plan left out any unexpected expenses? If so, your well-funded account may end up getting drained faster than you even realise. And after all of that planning, budgeting, saving, or taking on second jobs to build up your retirement fund, your efforts could almost feel like a waste of time and effort when you’re suddenly left with much less than you originally started out with.
This is probably one of the number-one retirement fund killers because it is sneaky and not easily seen in advance. Money doesn’t buy as much as it once did, so if you’re in your 50s today, inflation will definitely impact your retirement fund when you’re 65 (if that is your retirement age goal).
The cost of pretty much everything gradually goes up over time making it a lot harder for us to notice. In Australia alone, the average annual inflation rate from 2007 to 2017 (so far) has been around 2 to 3%, and in some cases up to 4.4% in just one year. * While historically inflation has been around 2%, it is safe to assume that inflation rates will be somewhere in that range.
However, what if inflation rates soar past 2% and go up to 4.4% like we experienced in 2008? Or, even up to 3.3% like in 2011? It is important for retirement planners to pay attention to these inflation rates because it will have some sort of an effect on the money we are putting away today.
With this historical inflation data in mind, let’s say the average inflation rate is at around 2.5% each year. It is safe to assume that your retirement fund will lose around 2.5% (give or take) each year. Even though this may put a bit of a dampener on things, there are some possible options to help overcome this obstacle without having to stretch yourself even further to accommodate these potential losses.
One common way many people try to get ahead of unavoidable inflation rates is through investing in stocks, since they typically beat inflation rates by providing large caps with annual returns that come out way ahead of inflation rates. Before diving into something like this, it is important that you talk with a good financial advisor on the Sunshine Coast to find out if this is the right approach for you and to learn about possible stock options.
Whether we like it or not, ATO will be collecting taxes from us as long as we are alive. It is essential that retirement plans include future taxes. If they don’t, an entire retirement budget could be thrown completely out of balance. For example, if you planned to retire with around $3,000 per month, that amount could end up becoming significantly less after paying taxes, which could possibly end up leaving you with a less than comfortable retirement. To understand how you may be taxed on retirement funds and how you may be able to combat this in advance, it is important to have an in-person discussion with your financial planner so you’re not caught with any surprises when you hit your retirement years.
Estate planning is essential for a variety of reasons. One of the common issues associated with lack of estate planning is that it often puts unfair burdens on family members. With so much emotion and stress of your loss, family members should not have to deal with legal and financial issues.
If no one knows what is going on and what steps or decisions to make, it could become costly for all involved and subsequently, any funds left could be quickly swallowed up in legal and financial costs. Even having a power of attorney and putting medical directives in writing are essential in a case where you may become incapacitated for any reason. Even the lack of having these in place could cause a lot of frustration and expense for your loved ones.
Healthcare and Medical Costs
While many people enter their retirement years in good health, there could be a time when all of that will change. Many people end up needing long term care sometime during their golden years and even though Australia is not the most expensive when it comes to long term care costs, the care is still not affordable for everyone.
To illustrate this, Swiss Re conducted a study* on the 12 countries where long term care is considered to be something people could generally afford. However, the study based it on average median incomes and the numbers tell us that in order to afford long term care for longer than a few months, Australians need an average income of $219,000 per year for up to 56 months of long term care.
The majority of Australians or Australian households do not earn this much money each year, with the average household income sitting between $80,000 and $107,000 per year, and this is often between two individual salaries. These numbers clearly tell us that there is just absolutely no way the majority of Australians could pay for their own long term care, if necessary.
The great news here is there are ways to overcome and prepare for this issue, which could be through purchasing a solid health insurance plan that offers long-term care options. This type of insurance protects you and your loved ones from the burden of these expenses, which means you do not necessarily need to plan to put away thousands of dollars just to cover these possible and often unexpected health expenses.
However, there is a right and a wrong time to make sure you have this type of health insurance. The wrong time could be waiting until you are retired to buy a plan as it will most likely end up being much more expensive. The better time would be to look into your options and buy a plan in your 50s or sometime in your pre-retirement years since pricing is generally much better.
Whether you buy cover for your future health needs or you decide to put extra money aside for these expenses, either of these options will need to be factored into your retirement plan and future expenses. Getting the cover you need earlier on could ensure that you are set to comfortably enjoy your retirement years without worrying about any unexpected expenses with set monthly or annual rates that are much easier to plan for, rather than throwing caution the wind and hoping you’ve managed to put away enough funds to cover these possible expenses.
Many people enter their retirement years with some health issues for which they are already being treated. If you already know your approximate expected healthcare costs, whether they be through your healthcare plan or out-of-pocket, then you should consider incorporating those projected costs just to be on the safe side. It is better to come out ahead than it is to come out behind with little to no opportunity to give your retirement plan another go.
As we all know, there is no way to go back and try again, which is why making sure all possible angles are considered and somehow factored into your plan for the future. Naturally, we cannot be prepared for every possible setback, but it is better to have a plan and not need it than it is to not have a plan and need one when it is too late.