“Annual income twenty pounds, annual expenditure nineteen pounds nineteen shillings and sixpence, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
Okay, £20 won’t get you far these days, but Charles Dickens’ message still rings true; if you want to be happy, spend less than you earn. It works for young people, it works for families and it’s really important for retirees on a fixed income.
Most 60-pluses realise from lengthy financial experience that when your income drops, you need to adjust your spending patterns as well, because although you might have retired with a decent superannuation balance, it can quickly fall if you don’t get a handle on your spending.
But knowing how others make the same transition, and that there are financial products that can help you manage it, can be helpful. Starts at 60’s money-savvy community has many smart tips to share on keeping an eye on your outgoings, which we’ve explained here. And we’ll take a look at how your super fund can help make your savings stretch further.
The brains trust
Three of the biggest expenses most families have to deal with are housing, transport and food. As retirement approaches, that shifts, with housing and health topping the list. That’s reflected in the way Starts at 60 readers approach their retirement planning.
Many report having factored in the cost of future-proofing their home or renovating to make their property safer or more energy efficient when doing their retirement budget spreadsheet, while others have done the sums on downsizing to see how it impacted their projected retirement spending.
Likewise, financially astute readers recommend considering the costs of health care – whether that be budgeting for private health insurance or putting aside savings for treatments or therapies you think you may need – when projecting spending in retirement.
Speaking of budgets, retirement day isn’t the time to draw one up. Instead, the Starts at 60 brains trust suggests that working out your budget should be an ongoing process, best started well in advance of retirement.
One reader, Susan Jarmo, says tracking expenses before you retire can help identify the unexpected costs that crop up from time to time. The process also works as a good test to see if your retirement budget is realistic, she adds.
“I’m now working on a very tight budget to see how that goes while we have a pretty normal income, to work out the minimum we need to live on after retirement,” she says.
Robert Silvestrini agrees, but adds not to bother going through old bank statements.
“Start keeping a record, in a diary perhaps, of how much you spend each day, and what you spend it on, for a few weeks,” he advises. “That will give you a pretty good idea of your average spend on, for example, groceries, meat, fruit and veg. Once you’ve done that, do the same for other items of expenditure.”
Don’t forget to consider the smaller, less essential outgoings that over time can add up to a surprisingly large sum. In a survey, Starts at 60 readers reported regularly outlaying cash on entertainment, holidays and, of course, the grandkids.
Having to scrutinise your weekly spending can be confronting, but it can also identify where you might be able to make savings. And there’s always a chance your budget could overestimate your spending needs. One reader, Donna Cox, found she’d budgeted too generously, allowing her to cut back on the amount she needed to draw down from her super once she’d retired.
She’s not alone. Although living on a fixed income for a long period may seem daunting as retirement looms, many readers find that the budgeting skills learned over a lifetime mean they’re still able to save, even in retirement.
In fact, almost 50 percent of readers responding to the same survey said that they continued to prioritise saving, even in retirement, and did so by putting aside money from their Age Pension, super income and investment returns, as well as by “spending less on the little things”.
Expect the unexpected
If you’ve done your homework, you’ll be able to cover the unexpected expenses that come along (like the air-conditioner blowing up on the hottest day of the year!). But what if your income drops? Suppose you’re relying on fixed deposits, and the bank cuts interest rates? Or you rely on rental income and can’t find a tenant?
Gemma Pinnell, the director of strategic engagement at Industry Super Australia, says super can add some certainty to your retirement income.
You can do this by setting up an account-based pension, which allows you to draw down an income from your super savings, while keeping most of the balance invested. Because the balance remains invested, it has the opportunity to increase through investment returns and thus potentially provide you with an income for longer.
“If you’re receiving an account-based pension from your fund, your regular payment doesn’t vary, which means you can budget from month to month, knowing your income’s going to be in your bank account,” Pinnell explains.
“And although super returns will vary depending on the investment option you’ve chosen, Industry SuperFunds have consistently provided investors with solid returns, on average well above those of the bank-owned retail funds.”
If you’re currently in a retail super fund, you can see how an Industry SuperFund’s returns and fees compares against your fund by using Industry SuperFunds’ online fund comparison tool.
Pinnell goes on to explain that although investors are required to draw a minimum pension each year (5 percent of the account balance for retirees aged between 65 and 74), Industry SuperFunds have on average historically returned well above that rate, meaning the account balance could actually grow.
“In the early years of retirement, many people find their balance increases, which could provide funds to upgrade the car or make small improvements around the house,” she says.
Account-based pensions are designed to be drawn down over the retirement years, with a higher percentage of the balance required to be paid out each year as the investor gets older. But Pinnell suggests those higher drawdowns can still help extend the life of your savings.
“As you age, you’ll be required to draw a higher proportion of your pension each year, but that income can be tucked away for a rainy day – there’s no requirement for it to be spent,” she says.
If you’re not sure how much income you’ll need when you retire – particularly if you’ve got your eye on a boat, new car or holiday – why not try out Industry SuperFunds’ free, online retirement income calculator?
And if you’re concerned that even with careful budgeting and smart selection of a super fund, your savings might not last the distance, you can read more about how to stretch your income even further here. Industry SuperFunds also has helpful tips on budgeting that you may want to check out for further inspiration.
Did you find your projected retirement budget was ample in retirement or too little? What are your best budgeting or money-saving tips?
This article was first published by Starts at 60 on 20 May 2019. The information referred to may change from the date of publication and care should be taken when relying on such information.