6 Steps To Create Your Ideal Retirement

Written by Kate McCallum, Multiforte

1. Grab a sheet of paper and start to map out your retirement lifestyle

Getting clearer on how your retirement lifestyle may look is an important exercise - and a perfect task for the start of the year.

If you're like most people who are planning for retirement, your vision of exactly what it will be like is fuzzy - you have an idea of the leisure activities you'd like to participate in, but you're probably unclear when you'll retire, where you'll live, how you'll maintain your social networks, how you will create purpose in your life and what resources you will need to be comfortable.

With increasing longevity, many of us will live longer than we imagine and will feel relatively young and healthy for much of that time. What you do with your active retirement life may be just as important and rewarding as what you did during your work life.

• What activities would you love to participate in?
• What skills or knowledge would you like to attain?
• Where will you live?
• Where would you like to travel?
• What community activities would you like to participate in?
• In what ways do you wish to assist other members of your family?
• What actions do you want to take now to maintain or improve your physical and mental health?

2. Now, consider the phases of retirement

Consider this. When the age pension was introduced in Australia in 1908, payable at age 65 (reduced for women to age 60 in 1910), Australian men had an average life expectancy of about 55 years, and women of about 56 years. So you had to exceed the average Australian lifespan by more than four years to begin receiving age pension benefits.

Today, the official retirement age remains at age 65, yet the average non-Indigenous Australian man can expect to live for about 79 years, and the average non-Indigenous woman for 83 years. It's clear that over the last 100 years, the quality of life for most people over the age of 65 has increased drastically. Rather than being elderly and in poor health, many people aged 65 are full of vitality and have easily two more decades of lively activity ahead of them.

Which means that it's helpful to consider retirement in several phases - each with different requirements. The first phase is likely to be a highly active phase, where you may even pursue a second career. Many people in this phase are physically active and may wish to travel extensively. You may have a second phase where you are less active. Maybe you still travel, but less further afield. Finally, you may have a final phase where you are less mobile, less independent and in need of care.

3. Work out how much money you will need to achieve your lifestyle plans

Most retirement calculators base their projections on your current annual income as a starting point for other calculations. For example, many suggest that you need approximately 80% of your pre-retirement income to maintain your lifestyle.

But does this really make sense? We think not.

Firstly, considering the different phases of retirement, it's likely that your annual income needs will vary. For example, when you are very active, you may wish to fund a range of leisure activities and international travel. In the final phase, you are less likely to have as many travel costs, but may need to provision for additional health and aged care.

Secondly, the connection between current income and planned expenditure is not clear. What if your current income is $100,000 a year and you're planning to spend $120,000 a year in retirement? In this case, your income understates your lifestyle. You need far more than 80% of your current income to achieve your lifestyle plans. Or conversely, what if your income is $300,000 a year and you're only planning to spend $100,000 a year? In this case, your income overstates your retirement lifestyle expenditure.

We believe it makes more sense to base your financial needs at retirement on your planned spending over your life expectancy, not your current income.

Our advice is to figure out what you think you will spend in retirement based on your specific needs and plans. We also suggest adding a buffer to provision for unexpected expenses.

To work out your annual income needs based on your expected spending, we suggest building a clear picture of what your retirement lifestyle will look like - and then costing specific activities or needs. (And, if you didn't finish the exercise in point 1, then now's a good time to complete that thinking.)

As discussed above, you should also consider the later phase of your retirement life and what elder care options you need to provision for.

4. Identify your sources of income and build a cash flow plan

Once you have an idea of how you will spend your time in retirement, and how much this will cost, you can start to build a cash flow plan for your retirement lifestyle.

In step 3, you've identified your likely expenditure. Now you want to identify your sources of income. Most individuals will rely primarily on income generated from their investments and superannuation assets when they cease work. Many people we talk to also plan to continue to earn some income, either from part time employment, consulting or Directorships. Some clients have ongoing passive income from royalties or business interests. Depending on your assets and income, you may also be eligible for some government benefits - you may be surprised to know that Centrelink benefits are available for people with investment assets up to $990,000.

Importantly, you will need to consider any tax payable to calculate your net income - this may include income tax, land tax on property investments and potentially capital gains tax on any asset sales. 

You should now be able to create a cash flow plan - to provide you with certainty that you will have enough money to meet your plans and needs. If you need assistance with this, please let us know.

5. Provision for the unexpected  

People sometimes make plans in a way that takes away flexibility or narrows their options. We prefer to create plans that add flexibility, and expand options. 

As a result, we recommend that you plan for the expected and provision for the unexpected. This may include adding a buffer to your annual expenditure estimates (say 10%) and provisioning for additional years of income in the event that you live longer than you expect.

6. Project your lump sum requirement

Your final step is to project the lump sum you are likely to require to achieve your retirement lifestyle. You will need to determine your expected returns over time (and we would suggest that this will differ before and after retirement), and ideally create a base case scenario as well as a pessimistic scenario should investment markets deliver lower than expected outcomes. You will also need to assume a rate of inflation, and estimate your likely life expectancy - with a buffer for longevity.

There are a range of calculators available online that you can use to assist you with these calculations. Depending on the methodology and assumptions used, different calculators may produce different results. Also, be conscious of whether the results are future values or present values (ie. in today's dollars), as you could end up over- or under-shooting your required lump sum.