When ensuring success in financial planning, it is easy for the mind to jump directly to making sure you don’t run out of money (see my Longevity post for more detail). How boring is that? The real fun lies in tying together your ideal lifestyle and making sure that you enjoy your twilight years.
Lifestyle objectives focus on maintaining your desired standard of living and enjoying your retirement with more discretionary spending. Unless you are very wealthy, these goals usually necessitate increasing your spending power.
This retirement planning aspect is an interesting one, as there is often a trade-off between lifestyle before and after retirement. However, having a plan for retirement means you can choose the exchange between “now” and the “then” that you want, as opposed to having it dictated to you. A big part of lifestyle also includes spending on loved ones without impeding your retirement success. Typical Lifestyle goals include travel and leisure, self-improvement, and social engagement.
Getting personal
Australians are known for enjoying a comparatively high level of lifestyle to the rest of the world. Like expensive health care, many of the main living costs that can drag down enthusiasm and create anxiety when retired are not as applicable here. With a high lifestyle level come higher costs, of course, so it is essential to run the ruler over your current and future expenditure.
A great place to start is with an interrogation of your current spending. If you do not do this already, I would strongly advise starting! In the past, this meant tedious and laborious bookkeeping, either on paper or perhaps using a spreadsheet. You can be forgiven for having one of these sitting unopened for many years somewhere; let’s face it, it’s not a workable solution for many.
Thankfully, there are several excellent online solutions now that can automatically incorporate your bank accounts, credit cards, and mortgages, meaning less time spent accounting and more time to ensure you are in control of your spending. Most will allow you to categorise your transactions, meaning that it will ‘learn’ and then automatically apply your monthly expenditure into the appropriate category over time. It will take some effort, usually a few hours a month initially, but once up and away, reviewing your finances at the end of the month can be done in 15 minutes. More on budgeting applications from Choice here. Another (which I use) is Money Brilliant, which does a competent job of sorting the 250 or so transactions a month that my family creates and reports well enough for my purposes.
Once you have a firm grip on your current expenditure, you can then trim and add to it for retirement purposes. Start by allocating your ‘must haves’ into one bucket that will need to be accounted for in retirement; rates, utilities, various insurances and general house upkeep spring to mind. Allowances for the maintenance of motor vehicles is another one. What you are trying to do is obtain a firm idea of your essential spending, plus a small margin of error, say 5%, to ensure your minimum lifestyle goals can be met.
Lifestyle budgets – The Industry Approach
A little shortcut to ascertaining (or at least comparing) a ‘typical’ cost of lifestyle is the Association of Superannuation Funds of Australia’s Retirement Standard which includes estimates for either a ‘Modest’ or ‘Comfortable’ retirement. These figures, updated quarterly to predominantly reflect inflation, can serve as a base point for retirement calculations. Theyinclude a detailed breakdown of what is included in the estimates to help you use them to reflect upon your situation. There is also a simple calculator that illustrates whether or not you are on track, using your figures and their projections.
Now for the fun part!
By now, you should have a firm idea of your baseload spending to keep your household afloat, terrific. Now we can concentrate on the real reason you have so diligently put away those retirement savings – to enjoy them!
Firstly, you should set up (or plan to set up) a regular income payment that includes the baseline requirements, plus a set amount for discretionary spending. The discretionary (i.e. not essential) component can often be a little harder to ascertain pre-retirement, but ideally, you should have a rough idea of your ‘spending money’. One suggestion is to allow a set amount (perhaps $500 a week) with the view that you can modify it as time goes on.
The other key consideration is to start with the big rocks, such as extended holidays and other oversized expenditure items that you would like to enjoy in your twilight years. This is where that list I was talking about earlier is handy to pull out and refer to.
The key reason to start with these is to plan, both from a time and financial perspective, to ensure that you can comfortably afford to achieve them and give yourself time to budget them in. Depending on the expenditure, a good approach often has a separate bank or investment account used to ‘side pot’ the required funds until spending them.
I have seen some people use a ‘special projects’ account, which is shielded from day-to-day spending and has its plan for both build-up, investment during and drawdown for these particular purposes. It also serves as an excellent place for occasional windfalls and other surplus cash to ensure that it does not dwindle in day-to-day spending, and means you may be able to realise these dreams earlier (or get a cabin upgrade!).
Getting your picture right for advice
All the above information is also fantastic when used with professional advice, can help lower the costs of getting someone else to do the work and give you a superior level of confidence that any projections and calculations will be an excellent fit for your circumstances.
From an industry perspective, using the key areas above (essential, ‘big rocks’ and discretionary), a plan can be derived that ensures that basic income is maintained and big rocks financial needs are met. From there your discretionary allowance can be adjusted to ensure that the first two goals are completed throughout the projection. Most people are happy to trim some optional spending if it means they can comfortably go on that Rhine river cruise or spoil their grandchildren. All it takes is the planning to bring reassurance that it has been thought out, and you stand the best chance of success during your retirement.
