It’s never too late to start a retirement savings plan. If you’ve got a reasonable income or some money in the bank, then you’ve already got a head-start.
Let’s take a look at how to implement an effective retirement savings plan, so that you can ultimately live your intended retirement lifestyle.
How to Create a Retirement Savings Plan in 5 Easy Steps
To put in place a retirement savings plan, you need to begin with the end in mind. Therefore, you will need to determine how much you need and when you need it.
1. Determine How Much You Will Need
The amount you need for retirement will be expressed as a lump sum value. This lump sum amount is what you should be targeting as your retirement savings goal.
Broadly, the amount you need for retirement will be determined by your retirement income objective and the number of years you would like to receive that level of retirement income.
In addition to your retirement income needs will be any amount you need for capital expenses, such as new cars, home renovations, etc.
To calculate how much you will need, read more here:
2. Determine Retirement Age (When You Need It)
Now that you have a rough idea of how much you will need for retirement, the next step in your retirement savings plan is to think about when you need it. Specifically, what is your intended retirement age?
The reason your retirement age is important is because it tells us how many years there are between now and retirement to implement your retirement savings plan and attain the lump sum value that you are targeting. For example, if you are 50 and you wish to retire at 60, then the duration of your retirement savings plan will be 10 years.
But, it does more than that. Because when it comes to retirement planning, your age is a very important factor. Your age is relevant to:
- When you can access your superannuation;
- When you can access your superannuation tax-free; and
- When you become eligible for any Age Pension entitlements.
These factors will not only influence the lump sum amount required for retirement (due to tax on income and earnings, plus supplementary Age Pension income), but also how you save for retirement (savings plan ratio for inside and outside super).
So, what age do you plan on retiring? These articles may help you figure this out:
3. Understand Where You Currently Stand
Okay, so now that you have your retirement age sorted and how much you need to retire on, the next step is to figure out where you currently stand – is your retirement savings plan on-track or off-track?
To figure this out, you will need the following:
- The current value of your superannuation and investments;
- The amount you need for retirement;
- Your current age and intended retirement age; and
- The amount currently being contributed to super by you and/or your employer.
Once you have collated this information, you should use an Australian retirement planning calculator to see whether your current retirement savings plan has you on-track or not.
This calculator may assist you with your calculations:
Once you’ve determined whether you’re on-or-off-track, you can then calculate how much you need to save.
4. Calculate How Much You Need to Save
If your calculations suggest that you are not on-track towards achieving your retirement income goals, then you need to amend your retirement savings plan and save more towards retirement, so that you meet your target.
To do this, add in the additional savings required each month or year to the calculator to get you to your intended goal.
You now have your retirement savings plan – the amount of regular savings you require to meet your retirement objectives. Then the question begs, how do you start saving?
Pro Tip: If you are already on-track to meeting your retirement goals with your existing savings plan, then you can keep doing what you are doing. Alternatively, you may consider seeing if an earlier retirement or a higher retirement income is achievable by altering your retirement savings plan.
5. Start Saving
Once you have calculated your retirement savings plan amount, it’s time to start saving. But how? And Where?
Generally, when saving for retirement, contributing more to superannuation is considered the most optimal savings strategy. The reason for this is because contributions to superannuation can not only reduce your personal income tax, but also provides you with concessional tax rates on investment earnings.
Let’s take a look at some of the best ways to save towards retirement and why.
Best Way to Save for Retirement: 6 Effective Strategies
The best ways to save for retirement usually involve making contributions to superannuation, due to the tax-effectiveness of superannuation savings strategies and the fact that you’ll likely have access to your super when you retire.
The only real downside of centering your retirement savings plan around superannuation is that any amount you contribute to super will be inaccessible until you retire. If you can deal with that, then superannuation is the way to go.
Given that we’re focusing on a savings plan towards retirement, I’m going to use superannuation as the vehicle to do that.
Here are some retirement savings plan strategies you can use to build-up your superannuation tax-effectively.
1. Make Concessional Contributions
A concessional contribution is a contribution that is made to superannuation that the contributor has claimed a tax deduction for. These include:
- Employer Superannuation Guarantee Contributions;
- Salary Sacrifice Contributions; and
- Personal Concessional Contributions.
If you are an employee, you will automatically be receiving employer contributions. To make additional contributions, you may also decide to make salary sacrifice contributions. The benefit of salary sacrifice contributions are that you will be increasing your superannuation balance and reducing your personal income tax by doing so.
Learn more about Salary Sacrifice Contributions.
If you are self-employed, you can make personal concessional (deductible) contributions to super, which increase your super contributions and provide you with a personal tax deduction equivalent to the contribution amount. In effect, a personal concessional contribution has the same outcome as salary sacrificing, but is designed for the self-employed. In saying that, an employee is also permitted to make personal concessional contributions.
Learn more about Personal Concessional Contributions
2. Make Non-Concessional Contributions
Another way to build wealth for retirement as part of your overall retirement savings plan is by making personal non-concessional contributions to superannuation.
Unlike concessional contributions which can reduce your personal income tax, non-concessional contributions do not reduce your personal income tax. The reason you might make non-concessional contributions to super instead of concessional might be because you:
- Have contributed up to your concessional contribution cap;
- Have maximised the tax benefit of concessional contributions, based on your taxable income for the year; or
- Would like to receive the co-contribution.
Learn more about Non-Concessional Contributions
3. Contribute to Your Partner’s Account
If you are in a relationship, another way to save towards retirement would be to make contributions to your partner’s superannuation account as part of your retirement savings plan.
There are a number of reasons why you might consider doing this, including:
- Spouse Contribution Tax Offset – You might be eligible to receive a tax offset of up to $540 each financial year by making contributions into your partner’s super account. Learn More.
- Account Equalisation – Making contributions to your spouse’s super as a means of equalising account balances can be beneficial to protect against potential future changes to legislation targeting higher account balances.
- Maximising Age Pension – Superannuation accumulation accounts are not assessed for Age Pension purposes while under Age Pension age. Therefore, contributing to a younger spouse’s super account can result in higher Age Pension payments for you. Learn More.
- Transfer Balance Cap – If your super balance is projected to be greater than the Transfer Balance Cap by retirement, you may consider contributing to a spouse’s super instead in order to maximise the tax-effectiveness of your investments in retirement. Learn More.
- Total Super Balance – If your total super balance already exceeds the Transfer Balance Cap, you will not be eligible to make standard non-concessional contributions and may, instead, decide to contribute to your spouse’s super account.
- Contribution Splitting – In some instances, you are able to split up to 85% of your concessional contributions to a spouse. This could be beneficial for a number of reasons, including earlier access to super, more Age Pension, ensuring you remain below certain thresholds or to protect against legislative change. Learn More.
Contributing to your partner’s super account as part of your retirement savings plan is a very under-utilised retirement planning strategy.
4. Consider Home Downsizer Contributions
If you don’t have a large savings capacity or really want to add some rocket-fuel to your retirement savings plan, you might consider making a downsizer contribution. A home downsizer contribution is available to people aged 55 and over and involves contributing up to $300,000 (per person) of your home sale proceeds into superannuation, without the contribution amount being counted towards standard contribution cap amounts.
Now that the kids have moved out, is downsizing an option for you?
Learn more about the home downsizer contribution.
5. Make Redundancy Contributions
You may have received, or be expecting to receive, a redundancy payment from your employment. If so, this payment could form part of your retirement savings plan.
Learn more about putting a redundancy payment into superannuation.
6. Reap the Benefits of CGT Retirement Exemption Contributions
And, finally, here’s one for the business owners. If you plan on selling a business or business asset, you can exclude all or part of the realised capital gain resulting from such a sale by contributing up to $500,000 of the proceeds into superannuation.
Learn more about the CGT retirement exemption.
Once you’ve got your retirement savings plan sorted, it’s important to consider ways of protecting your retirement savings.
How To Protect Retirement Savings
The way to protect retirement savings is to ensure that you are only taking on as much risk as is required to meet your retirement objectives. By doing so, you have greater certainty of attaining the expected returns and retirement income.
Other ways that you can protect your retirement savings include:
- Diversification – invest across a range of asset classes, sectors, industries and management styles. Let me show you how here.
- Reputation – Ensure that the product providers you are using have appropriate licensing, good customer service and a strong reputation.
- Advice – Obtain advice from a financial adviser that specialises solely in retirement planning advice for a one-time flat fee.
There is no guarantee that these steps will completely protect your retirement savings. In fact, there is no way of completely protecting your retirement savings; but they will go a long way to ensuring that your retirement savings are as protected as possible while still meeting your retirement needs.
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
Listed below are some frequently asked questions around retirement savings plans.
How Long Will $500,000 Last Me in Retirement in Australia?
In Australia, $500,000 will last you around 30 years if you are a single person retiring at 60 on $42,000 per year, or $46,000 per year if you retire at 65. If you are a couple, $500,000 will last you around 30 years on $50,000 per year if you retire at 60 and $60,000 per year if you retire at 65.
Is $1 Million Enough to Retire On?
Yes, $1 Million is enough to retire on if you are a single person and would like to retire at 60-65 with an income of $60,000 per year for 30 years. If you are a couple, $1 million would be enough for you to retire on if you would like to retire at 60 with an income of $80,000 per year for 30 years, or retire at 65 with an income of $85,000 per year for 30 years.
Is $1.5 Million Enough to Retire on at 60?
Yes, $1.5 million is enough to retire on at 60 if you would like a retirement income of $80,000 per year for 30 years, based on an investment return of 6% p.a. and inflation of 2.75% p.a. This is both the same for an individual or a couple (combined). Read more here.
Is $2 Million Enough to Retire at 60 in Australia?
Yes, $2 million is enough to retire on at 60 in Australia if you are single and would like a retirement income of $115,000 per year for 30 years, or are a couple and would like $125,000 per year for 30 years, based on an investment return of 6% p.a. and inflation of 2.75% p.a. Read more here.
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