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Retirement miniseries – part 2

The first thing I do to help a client prepare for retirement is determine what they want that part of their life to look like.

When I work with a client on a retirement plan, it’s a bottom-up approach.

So imagine you’re 60 – what do you want your lifestyle to look like, how much would you like to have to spend a week, how often do you want to travel each year? Now, get rid of the anchors where you are only extrapolating out what you currently think is possible. What do you really want your retirement to look like? NOW we are getting somewhere.

It’s about helping people imagine what life they want and identifying a number together that covers their fixed expense line, their variable expense line, and then a ‘desired’ discretionary expense line.

If you’ve got 10 years to get there, it’s not essential that the number is exact to the dollar. What is essential is that we know if you’re a $60,000 a year person, or a $90,000, $120,000 or $150,000 a year person, then we know where we should set our sights.

The sums are quite simple. We can factor in inflation each year for the rest of your life, ensure there’s some contingency then work out if there’s a gap from where you are now to where you need to be in 10 years to never run out of capital.

Then we start to overlay strategies into our plan today and forecast those forward to see how close we are. And that helps us understand what level of strategy we need to build, what level of saving we need to do, what level of risk we need to take with your investments.”

And if there are bad times, as we know there are, it’s important to have discussed psychological strategies to avoid people making rash decisions like selling out of fear. In fact, buying into these crises can often prove very profitable.

Beyond the 10-year threshold

The good news is that while some harder decisions may be required, there are still plenty of options to live a comfortable retirement lifestyle if people have missed the 10-year planning period.

A lot of people struggle with the myth that by the time they reach retirement age, they should have paid off all debts and have everything in cash or ready to invest conservatively for retirement.

The truth is, you can get to 60 and still have property debts and superannuation that remains fully invested.

It is simply a case of determining what you have to do when your salary is turned off to meet your living expenses and service any debts. Otherwise, it might be business as usual.

Debts are not the enemy of retirement life. It’s just a case of determining if the cost and risk of having that debt is more significant than the return on the capital invested.

A lot of the time people think it’s too late so they’ll cash out their super, pay off their debt and just live on what’s left. Sometimes the better financial decision might be to keep money invested, growing in value and delivering a return, then use some of the income to pay the debt off over time.

That way they’re still creating wealth instead of destroying it by getting rid of all their investments.

If you were in that situation, a financial adviser might help you maintain your debts and generate growth on those investments maximising your opportunity to pay down any debts in a smarter fashion.

Catch Part 3 of the retirement mini-series next month.

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