How to Prepare for Retirement: A Step-by-Step Guide

If you’re in your late 50s or 60s, it’s probably time to prepare for retirement. In fact, it’s never too soon to prepare for retirement, but most of us leave things until the last minute.

Preparing for retirement begins with some basic fundamentals. Once the basics are sorted, you can then utilise as many retirement planning strategies as you like to further reduce tax and optimise your retirement plan.

I’m going to show you why it is important to prepare for retirement, what you need to do to prepare for retirement, and how to avoid crucial mistakes.

Preparing for Retirement in 7 Steps

Detailed below are the required steps to prepare for retirement. As we go through these steps, I’ll also be providing you with additional resources that can help you retire sooner and with more.

Preparing for retirement shouldn’t be seen as an arduous task. It can be as simple or as comprehensive as you like, but there are certainly some very tax-effective strategies you can implement between now and retirement that can really increase the lifestyle you live throughout retirement.

Here’s the steps you need to take to prepare for retirement.

Step 1: Define Retirement Goals

The first step in preparing for retirement is to define your retirement goals and objectives. How do you envisage retirement?

Retirement goals can include both financial and non-financial goals and the more precise your goals are, the easier it will be to plan for them.

But don’t be mistaken, clearly defining specific retirement goals does not set them in stone; it merely provides you with a starting point. It’s very important to simply get started. In a moment, I’ll explain how these goals may quickly change.

But for now, here’s the types of goals you should consider.

The types of goals you should begin with when preparing for retirement include:

• Non-Financial Goals;
• Capital Expenses;
• Lifestyle Expenses; and
• Travel Expenses

Detailed below is an explanation of each of these, plus some examples.

Retirement Non-Financial Goals

Non-financial (or qualitative) goals include ways that you would like to live throughout retirement and are usually focused on things like family, health, lifestyle and hobbies, rather than financial expenses.

Some examples of non-financial goals could include:

• Spend more time with the grandkids.
  • To be more specific you might say, spend time with the grandkids on Tuesday and Friday mornings.
• Get healthier.
  • To be more specific you might say, go to the gym twice per week, yoga once and make better food choices.
• Learn a language.
  • To be more specific you might say, take Italian lessons once per week.

Make a list of your non-financial goals as your first step in preparing for retirement.

Non-financial goals will not necessarily impact your retirement financial plan, but it does help provide a greater visual of what your retirement will look like on a day-to-day basis, which can help you prepare for retirement mentally and emotionally.

Retirement Capital Expenses

Retirement capital expenses are one-off lump sum expenses that will be incurred at the beginning of retirement and throughout. In my experience working with clients, it is common for several capital expenses to be incurred during the first 12-months of retirement, followed by a smattering throughout retirement.

When it comes to financial goals, these need to be specific – even if you’re not sure of what the precise cost will be. For example, you might have capital expenses such as these:

• At retirement, complete kitchen renovations at a cost of $20,000.
• Upgrade my car at age 63 every 7 years thereafter until age 85, at a cost of $30,000 each upgrade.
• Purchase a caravan for $60,000 during the first year of retirement.
• Gift $25,000 to each child when I reach age 65.
• Go on a once-in-a-lifetime holiday to Canada at age 65 at a cost of $50,000.

What are your retirement capital expenses? Make a list.

Capital expenses such as these are generally one-off expenses, which should be differentiated from regular retirement lifestyle expenses, as described below.

Retirement Lifestyle Expenses

Retirement lifestyle expenses are regular monthly and annual expenses that cover your everyday needs, such as groceries, clothing, rates, registrations, electricity, phone & internet, fuel, insurances, pet costs, gym, restaurants, alcohol, gifts, etc.

An example of a retirement lifestyle expense goal should be as simple as:

• Cover retirement expenses of $50,000 per year throughout retirement, from age 63 until age 100.

To complete this step, you need to be specific with the value and the timeframe. This budget planner may help you calculate what your retirement expenses will be.

The final step in outlining your retirement goals is to calculate your travel expenses.

Retirement Travel Expenses

Retirement travel expenses are regular travel expenses that you expect to incur every year or every other year. This is different from, say, a big one-off trip; because a big one-off trip should be noted as a capital expense, above.

Some examples of retirement travel expenses could be:

• Spend $7,000 each year on domestic travel until age 80.
• Spend $20,000 every second year on international travel, until age 75.

Retirement travel expenses are the final goal-setting step.

By following these steps, you should now know:

• Your non-financial goals;
• Your capital expense goals;
• Your lifestyle expense goal; and
• Your regular travel goals

However, before getting started on your retirement plan, it’s important to understand at what age you are eligible to access your superannuation, as this will play a big part in funding your retirement.

Step 2: Know When You Can Access Your Super & Age Pension

There are a few important ages to be aware of when it comes to preparing for retirement. These include:

• Superannuation Preservation Age – ranges between 55 and 60 depending on when you were born and allows at least partial access to super, regardless of your employment status. Your preservation age allows full access if you meet the superannuation definition of retirement. Use this table to calculate your preservation age.

 

• Tax-Free Super Withdrawal Age – age 60 generally allows for tax-free withdrawals from superannuation.
• Superannuation Full-Access Age – age 65 allows full, unrestricted access to your super, regardless of employment status.
• Age Pension Age – ranges from 66 ½ to 67, depending on when you were born.

 

Understanding these ages can better help you plan for retirement.

Step 3: Perform Initial Projections

Okay, so now that you know what your goals are and when you can access your super, the next step is to perform some initial projections.

Initial projections are designed to show you whether you are currently on-track or off-track and whether any changes to your retirement plan should be made.

There are three potential outcomes that can occur after performing initial projections:

1. You will be comfortably on-track towards meeting your goals and objectives;
2. You will be completely off-track; or
3. You will be somewhere in-between.

No matter which outcome you find yourself in, we still have a way to go to optimise your retirement, by utilising the levers available to you.

But for now, go ahead and perform your initial projections using an Australian retirement planning calculator that includes Age Pension calculations, such as this one, then move into understanding your levers.

Step 4: Understand Your Levers

Once you’re performed initial projections, you can now apply one or more of the following levers:

• Retire Sooner/Later
• Reduce/Increase Retirement Expenses
• Reduce/Increase Savings Between Now and Retirement
• Reduce/Increase Risk & Associated Return of Investments

For example, if you are comfortably on track towards meeting your objectives, you might bring forward your retirement by a few years, or use a combination of bringing retirement forward by one-year and slightly increasing retirement expenses.

If you are completely off track, you might try to save more between now and retirement and increase investment risk with the hope of getting higher returns. Alternatively, you might work an extra couple of years, or reduce your retirement expenditure.

Using these levers to apply an adjustment to your initial projections can alter the outcome to a point where you have the foundation of your retirement plan. The next step is to add some rocket fuel to your super, by considering suitable strategies that can reduce your tax and bump up your retirement savings.

Step 5: Consider Retirement Planning Strategies Available to You

There are dozens of strategies that you can use towards preparing for retirement, particularly in your final working years. Here’s a few that I’ve compiled for you:

• Investment Options for Retirement – the pros and cons of 7 retirement investment options…Read More
• Tax Strategies for Retirement – 8 tax-effective ways you can prepare for retirement… Read More
• Retirement Drawdown Strategies – 3 different options to draw down on your savings to fund retirement… Read More
• Retirement Investment Strategy – Your retirement investment strategy in 5 simple steps… Read More
• Transition to Retirement Strategy – The benefits of a transition to retirement strategy, including how to start one and examples…Read More
• Retirement Income Streams – 7 ways to generate income and cover expenses throughout retirement… Read More

These retirement planning strategies will allow you to get more from your super, so that you can retire sooner and have your retirement savings last longer. Once you’ve decided which retirement planning strategies you would like to implement, it’s time to perform your final projections.

Step 6: Perform Final Projections

Performing final projections is done in the same way as the initial projections, but now you will be altering the projections based on any changes you made to your goals and objectives through the levers process, as well as any retirement planning strategies you will be implementing. Again, you can use this calculator to perform your final projections.

And there you have it! You have successfully prepared for retirement.

Step 7: Review and Repeat

It is inevitable that changes in your circumstances, super rules, tax rules, investment returns and social security  will impact your retirement plan.

Your retirement plan should be reviewed regularly. A general rule of thumb is that your retirement plan should be reviewed every 3 years, or sooner if there is a significant change in your personal circumstances.

To review, you simply go through the process again, beginning from goals and objectives through to final projections.

Why Is It Important To Prepare for Retirement?

It’s important to prepare for retirement, because it gives you context around where you currently stand and what decisions to make in relation to retirement dates, work hours, savings capacity and investment risk. Without preparing for retirement, you’re just playing a guessing game about when you can retire, how much you can spend in retirement and how your super should be invested.

What are the Crucial Mistakes in Retirement?

The biggest and most crucial retirement planning mistakes all stem from failing to implement the steps required to prepare for retirement. Some of these retirement planning mistakes include:

• Working too long unnecessarily
• Not optimising your contribution strategy
• Not choosing appropriate investments
• Failing to take into account inflation and the Age Pension
• Not seeking professional retirement planning advice

If you would like to dodge a few retirement planning mistakes, read on: 5 Biggest Retirement Planning Mistakes That People Make

Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.

Frequently Asked Questions

Here are some frequently asked questions in relation to preparing for retirement.

What is the Best Way For a Person to Prepare for Retirement?

The best way to prepare for retirement is to follow these steps:

1. Retirement age: When would you like to retire?
2. Consider your objectives: What does an ideal retirement look like for you?
3. Calculate your current progress: Use a retirement planning calculator to determine whether you are on or off track.
4. Make amendments: Adjust your retirement age, retirement income objectives and/or investment risk, where necessary.
5. Implement strategies: Utilise retirement planning strategies available to you to minimise tax and invest more in the tax-effective superannuation environment.
6. Final projections: Now that you have made the required adjustments to your plan and implemented superannuation strategies, use the calculator again to see the outcome.
7. Review: Every few years, you should review your goals and objectives, update your projections and see if any changes to superannuation or tax rules will affect your strategy.

These are the steps to best prepare for retirement. You can do this yourself or, better yet, seek personal retirement planning advice from a licensed financial planner that specialises in retirement planning.

What is the First Thing to Do When You Want to Retire?

The first thing to do when you want to retire is to consider when you would like to retire and the level of income you require throughout retirement, including travel costs and capital expenses. These are known as your objectives. Once you know your objectives, you now have a starting point for building your retirement plan.

What is the Biggest Worry About Retirement?

This biggest worry about retirement is knowing whether you have enough to retire or when you can afford to retire. Without professional advice, it can be difficult to project with confidence how long your retirement savings will last. Furthermore, implementing retirement planning strategies without advice can be of concern, because thorough knowledge of the rules is necessary to ensure your transactions remain compliant and do now cause any unintended tax implications.

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