Planning for Retirement in Today's Uncertain Environment

Creating a plan has never become significant than today because of the uncertain economic, financial and health-related downturns happening across the globe. Risks are arising that can affect even the most carefully designed retirement plans. Who would have thought of a pandemic crisis like COVID-19, back in 2017?

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Can you predict your future?

Market volatility has become the main concern to plan retirement. It is vital to have a plan to reduce the negative impacts. Because usually, a gain required to recover a loss is greater than the incurred cost. Market volatility affects the retirement age and how long a retired person’s income will last.

Black Swan Effect is a financial metaphor indicating a huge loss near a retirement period or during the retirement period. Initially, people didn’t believe there are black swans but seeing a black swan changed their perception about swans. Similarly, when there is an unexpected loss naturally, humans would think that will not happen to them but ultimately, that leads to putting the retirement savings at risk. Dot- Com bubble burst in 2000, Global Financial Crisis in 2008, and even COVID-19 can be considered as recent black swan events in the world. Indeed, these events don’t happen daily. However, one such event can destroy the retirement plans with the large market drops. Investment losses reduce the number of years in generating retirement money.

The greatest wealth is health

There is an increase in medical expenses when a person grows old and there are more chances of getting a chronic illness with the age. Healthcare cost is another imperative cost that affects retirement. The medical costs are rising daily. Age Pension benefits in Australia will cover only after the age of 66 and the pension payment is reduced if a person’s other income is over a certain limit. It is wise not to solely depend on the Age pension or any other benefits like Pensioner Concession Cards. The retirement plan needs to be designed on how to cover unexpected healthcare costs. Australian government’s healthcare benefits like free vaccinations, cancer screenings, Medicare safety net, free home medication reviews will help to reduce the healthcare costs of a retired person only up to a certain extent.

Most of the people today think they will live till about 85 years of age. They plan the retirements up until that age. But what will happen if a person stays longer than that? So, it is ideal to always plan for the longest period possible and that will save money for any emergencies even if the person passes away at 85 years of age.

What is the best investment?

When investing for retirement income a lot of people tend to go with fixed-income allocations with less risk like bonds. But it is imperative to note that yield, interest rates are getting relatively low in those types of investments. Also, the time to invest and save money is before a crash happens and you should have the self-control to hold on to that money if you need a peaceful retirement. A person should plan for retirement at the early stages of his or her career because of all the uncertainties in the present world. A longer plan has more stability than planning the retirement two or three years ahead. However, this plan needs to be revisited several times during the years because of market volatility. It is quite evident that the State Pension will not be enough for a comfortable retirement. It is best to diversify income from different sources to reduce the negative impacts.  According to the Association of Superannuation Funds of Australia’s Retirement Standard (ASFA), a single person will need $545,000 and a couple would need $640,000 retirement savings to have a comfortable retirement. However, the lifestyle of people is different from one another. So, the money required for a person to live comfortably might not be enough for another person’s lifestyle. Also, with all the uncertainties you cannot predict this is the exact amount you will need for a comfortable retirement.

Did you know investing in yourself at present could give you a much better retirement?

It is not only future events that will affect retirement. If a person works well at present, has clear career targets on what they want to achieve, then the person can grow up higher in the career. When the present salary grows higher you can have a much clear plan for your retirement. On the other hand, a busy lifestyle has given no time to invest in a person’s health. Fast food, higher stress, the polluted environment creates a lot of chronic illnesses. But if a person concerns about his or her health today, it is going to be their investment for future retirement. A person has the upper hand to control what sort of retirement that they would get.

SMART Retirement Plan

One common mistake people make when making a retirement plan is not having clear, defined objectives. A proper plan needs to have primary and secondary objectives. For example, primary objectives can be; to never run out of cash to live comfortably, not to be a burden to anyone. Secondary objectives can be; to leave a specific amount to different purposes, family, or even charity. A retirement plan needs to be designed with proper forecasts as much as possible. Also, it is vital to consider the retirement facilities offered by the Australian government like Low-Cost Banking when designing the plan.  It can be forecasted by adding up all the monthly income from stable sources and netting off with expected expenses both discretionary and non-discretionary. ASFA offers retirement trackers to do this calculation. It is always better to predict higher considering the tax increases, inflationary issues, etc. The calculation will mostly give you a shortfall. This is when a person should think of savings & investments.  If a person gets a surplus he will be in good shape. But with the uncertainties, there is less probability with predictions. That is why defining the objectives for a retirement plan becomes critical. A person should not be planning for retirement, but he should be planning through retirement. Deciding the retirement age is mostly based on the preservation and age pension eligibility ages of Australia. However, it is worth considering the circumstances about you, your financials, and your surroundings before deciding the retirement age.

It is not only about Finances

Another misconception about retirement considering that retirement is all about planning for finances because it is the most affected by the current uncertainties. But there are other aspects as well to plan. Many retired people suffer from loneliness, not having a purpose to live, being a burden to your family. So, a retirement plan should consider all those aspects from finances, health & wellness, family and even post-health event plans.

An individual will have increasing personal responsibility for their retirement planning. The planning has become highly complex with uncertainties. But one must always keep in mind that, it is the life that is in your years which matters the most than the years in your life and for that a proper retirement plan is essential. It is never too early to begin a retirement plan especially with all the uncertainties in the world.

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