Financial Planning: Expert Considerations for Retirement
Retirement planning steps will change throughout our careers. If you’re in your mid-30s to mid-40s and accumulating wealth with a view to retirement, it’s a critical time to think about your strategy and how much you’ll need to retire comfortably. While you still have many years to build up your retirement funds, making the right decisions now will help you maximise what you’ll get when it’s time to retire. In this article we will take a closer look at important retirement wealth factors to consider if you are in your 30s or 40s.
Current economic and investment environment
While looking towards the future, it’s essential to consider the current economic environment and how it can influence your investment decisions and returns. Some of the significant changes that have occurred recently are inflation, interest rates and real estate prices.
From 2002 to 2021, the annual inflation rate in Australia stayed comfortably within the 2% to 3% goal set by the RBA, except for 2008, when it reached 4.5%. In 2023, the inflation rate hit 7.8%, the highest since 1990. While inflation is comparatively high, it’s expected to have peaked. RBA forecasts are for inflation to decrease to 4.5% by the end of 2023 and return to the preferred 2% to 3% range by mid-2025.
The flow-on effect of high inflation has been the interest rate increases by the RBA to rein in inflation. RBA cash rate increases began in May 2022 and reached 3.35% in February 2023. Economists at Australia’s major banks are predicting interest rates to increase to between 3.6% and 3.85% between March and May 2023 and decrease in late 2023 or early 2024.
These interest rates have dampened housing prices in most capital cities. For example, the average house price in Melbourne dropped by 9.4% between January 2022 and 2023.
These economic developments have an impact on investment planning. Considering the inflation rate when investing for retirement, higher inflation means greater returns are needed to outpace inflation and avoid going backwards. Higher interest rates will affect investment choices, including whether to invest in term deposits. Also, the historic increases in house prices made them a popular investment, with around 20% of Australians owning an investment property. Slower and negative growth due to higher interest rates has changed the realities of residential property investment, especially when many are negatively geared and rely on long-term capital growth for returns. Although property investment is still an option, economic changes need to be considered looking at this form of investment. More on this in our blog about rate rises.
How much will I need to retire comfortably?
The answer to this question will depend on many factors, including how much you need to live comfortably in retirement and whether you own your home and are no longer making mortgage payments. The answer will also depend on how much you already have in superannuation and other investments, and how much you can expect to receive from an aged pension.
People have different wants, needs and lifestyle expectations, so they won’t have the same financial requirements. One rule of thumb for a comfortable life in retirement (according to The Association of Superannuation Funds of Australia (AFSA)) is two-thirds of your annual income when you were working. Of course, your income will change over time, as will economic circumstances.
For a couple retiring now, estimates are $68,014 for a comfortable annual income and $44,034 for a modest yearly income during retirement. These estimates will increase as inflation requires more money to retire. For example, if you are 40 now, want to retire at 65, and the average annual inflation rate is 3.00%, the numbers above will be $142,406 and $92,197 annual retirement income.
The difference between the terms comfortable and modest retirement includes factors such as leisure and dining out, the type of car you want, level of home maintenance, frequency and types of travel and the level of health insurance.
While you can find retirement savings calculators online that consider your age, income, super balance and desired retirement age, a financial advisor can assist by looking in-depth at all factors, including your circumstances and goals.
“For a couple retiring now, estimates are $68,014 for a comfortable annual income and $44,034 for a modest yearly income during retirement.”
What is a holistic approach to accumulating wealth?
There tends to be an emphasis on how much you need to retire, but there are other aspects to consider when growing your wealth, including how you plan to protect, enjoy and distribute it.
You can do everything right to grow your wealth, but you also need to consider wealth protection. A significant part of this is insurance that will protect your wealth for your family in case of death or disability. While many superannuation accounts include life insurance, the standard coverage amount is often insufficient to protect your wealth. Planning how to distribute your wealth once you retire must be considered to minimise tax and mitigate risks such as market downturns.
In addition to insurance, estate planning is a crucial part of wealth accumulation that is often ignored. It draws upon knowledge of taxation, superannuation, investment, legal and financial planning. It includes creating and updating documents such as wills and powers of attorney to protect your personal and business wealth.
A holistic approach to accumulating wealth also involves budgeting your income to maximise investment and financial stability. Setting up a budget, tracking expenses and following a plan enables you to meet financial commitments, create an emergency fund, and save for large expenses such as a home or car. Having a budget puts you in a better financial position in the short and long term.
Your attitude towards risk is another aspect of a holistic approach to wealth accumulation. When you are younger, you might be more comfortable with high–growth investments that tend to be more volatile. Later, as you approach retirement, you might prefer less risky investments with lower volatility but less growth potential.
How a financial advisor can support your wealth accumulation
Your 30s and 40s are a great time to start thinking seriously about accumulating wealth. You can do many things on your own, but there are areas where professional advice can help you get ahead. Financial advisors can assist in many ways.
They have experience backed by a wealth of knowledge to help you make informed financial decisions. Having in-depth knowledge and expertise enables financial advisors to provide professional advice and guidance on various investment strategies based on your personal situation, risk tolerance and goals.
Financial advisors provide an outside perspective on your financial situation. While you are focusing on earning money, it’s easy to get set in your ways and develop blind spots that can stifle your wealth accumulation.
They can monitor and review your financial plan's progress and make necessary changes. They also keep up-to-date on changes in markets and legislation, such as tax implications, and make adjustments as needed.
Financial advisors provide peace of mind. Instead of worrying whether you are on the right path with your retirement planning, a financial advisor can give you peace of mind, knowing your finances are in good hands. The amount of information to consider and ongoing changes can lead to stress and confusion.
How we can help you plan for retirement
Lanteri Partners Group develops and implements tailored financial plans that create, build and protect your wealth. We have achieved excellent outcomes for our clients for more than 29 years because our team members are lateral thinking, dedicated and experienced. Our complete range of financial services is connected under one umbrella to cover all financial opportunities and life stages – so you can live and retire well. Reach out to the Lanteri Partners Team if you have any questions about your current financial situation. https://www.lanteri.com.au/contact-us