Tips On How You Can Best Budget For Retirement

Sydney Morning Herald

Tuesday April 28, 1992

By NICK RENTON

THE transition to retirement is not an easy one. As one wife commented: "When your man retires, you get twice as much husband and half as much money.

Emotional and economic security in retirement require advance planning. Proper budgeting is part of this process. It involves looking at your expected expenditure - establishing how much money you, or you and your spouse, will need.

These calculations are best made on a "per annum" basis because some relatively large items (such as insurance) may occur only once a year and because others (such as the bills for heating) tend to follow a seasonal pattern. Allow for fixed items, as well as for variable or discretionary ones

There is no need for elaborate forms when examining budgetary data - a plain sheet of paper with headings appropriate to your particular circumstances is fine: food, clothing, entertainment, bills etc.

Bear in mind that after retirement your lifestyle will be different. You will no longer have certain outgoings. For example, you will no longer be incurring work-related expenses - superannuation contributions; daily travel; certain clothing; fees to professional associations.

You may yourself have the time to do certain tasks that you previously had to pay others to perform and you will probably make much less use of credit cards. Additionally, you will become eligible for some concessions.

Some expenses could increase, especially if you choose to spend more money on hobbies, on travel, on entertainment and possibly on services that previously were available to you through your employment. Always build in a reasonable margin for contingencies.

You will then want to match this against your expected income after retirement. Typically, the principal items will be:

* Investment income from non-superannuation assets.

* Income from investing lump sum superannuation benefits.

* Superannuation pensions.

* Purchased annuities.

* Social security or veterans' affairs pensions.

Make sure your take into account the effect of tax and the social security pension income test on each of these income sources. Remember also that with superannuation you will pay a lump sum tax from 0 to 16.25 per cent on taking money out of the fund, depending on the composition of your money. The tax will be higher if you take the money out before you turn 55.

Many people underestimate non-superannuation assests that can produce periodical investment income in retirement. Make sure you include such items as past personal savings, proceeds of maturing life insurance policies, cash realised by selling a business, the net cash realised in the course of changing houses, other cash received on the termination of employment.

The difference between the expected outlay and the expected income will show you how well you are going to cope - at least in the first year.

Having worked out your initial income and outgoings, you should then look separately at what inflation may do to your finances.

Your income is unlikely to increase at the same rate as the cost of living

If you put your money into fixed interest investments - as distinct from growth situations, such as ordinary shares or property - then that portion of your income will not move at all in line with inflation.

You can get a rough indication of this from the approach described in what follows, which assumes that you wish to keep your savings intact in real terms(that is allowing for inflation). It will show you whether you have already achieved your target and, if not, how much further money you will need to save in order to get there or alternatively whether your target is actually achievable.

Suppose, purely for the purpose of illustration, that you invest you money at 10 per cent before tax; that on average your marginal tax rate will be 50c in the dollar; that the rate of inflation will be a mere 2 per cent per annum

(These are not meant to be realistic figures, but once you have understood the method then you can substitute figures of your own choice. You can also see the affect of changing the assumptions.)

The 10 per cent before tax will become 5 per cent after tax, at the 50 per cent tax rate postulated. If the rate of inflation is going to average 2 per cent, then you will need to invest a further $2 for every $100 previously invested, so as to keep the value of your capital constant in real terms and so that next year's return will keep pace with inflation. You thus have 3 per cent left to spend. This 3 per cent (5 per cent after tax, less 2 per cent inflation) is the yield after taking tax and inflation into account.

If you wish to have, say, $30,000 per annum for spending, then you will need a lump sum of $1 million (as 3 per cent of this figure is the desired$30,000). Just divide the spending figure by the after tax/after inflation yield:

30,000/3 x 100 = 1,000,000

(If you wish to have, say, $36,000 per annum, you will need $1.2 million, and so on.)

If an analysis on the above lines indicates a shortfall then you will need to revise your thinking accordingly.

This may be painful, but at least it is better to be forewarned. There are several possibilities, singly or in combination.

If you recognise a shortfall in advance, the phenomenon early enough, then you may also be able to step up your savings before retiring.

For some people, retirement at a certain age is compulsory, but many others can select their own retirement date within certain limits. In choosing a date you must go through a budgeting process and make sure you have enough. The earlier the retirement, the lower your after-tax lump sum superannuation benefits and any other savings will be and the longer it will have to last.

You could also reduce your post-retirement outlays by taking appropriate action while you are still in the work force. Another approach is to reduce your planned expenses.

These probably include a number of discretionary items - such as entertainment, travel and the like. These can be fine-tuned to help make the budget balance.

Do not, however, fall for the temptation to reduce your post-retirement outlays by moves which involves false economies, such as underinsuring your assets or dropping long-standing hospital cover just when you are most likely to need it.

As an alternative, you may be able to increase your investment income. You could rearrange your portfolio by switching from low-yielding stocks to high-yielding stocks.

STEPS TO MAKE IT SIMPLER

These are a few sensible steps that will make it easier for you to budget in your retirement.

* Ensure that all your loans are paid out - especially the large ones related to the purchase of your home or your car but also any smaller ones arising from the purchase of consumption items and/or the use of credit cards

* If you are a tenant, buy a house in order to avoid an ongoing (and no doubt ever-increasing) commitment for rent.

* If you already own a house, move into smaller accommodation to free up some capital and to involve you in a lower burden in respect of recurring items such as rates, taxes, insurance, upkeep, gas and electricity.

* Repaint, repair and refurbish your house so that it will not need further expenditure of that type for some years.

* Have your house insulated to cut down on future heating and cooling costs.

* Buy a new car that is more fuel-efficient and less likely to need expensive repairs in the short term.

* Rearrange your assets in order to maximise social security entitlements