Many of us worry about our lives beyond retirement, whether we will have the money we need to live the kind of life we want. This can be even more difficult if retirement is still a long way away. We feel the pressure to be financially well prepared, but we don’t know exactly how prepared we need to be.
This is because saving for retirement is very different from other kinds of saving, like saving for a house or a car. When we are saving for something with a price tag, we can work out with pretty good accuracy what we need to do to meet our goals. But the amount of money we need to retire is not fixed. This is because we don’t know when we will retire, how long we will live for, or the cost of the retired life we want to live. In particular, these questions impact our decisions on how best to invest our superannuation. What kind of risks can we afford to take?
This is where the flooring approach to retirement planning comes in. The flooring approach is a practical guide to helps ensure you have enough money to meet your needs and enough leeway to maximise your investment returns.
In this article, we outline the flooring approach and how it can be used to maximise a person’s retirement savings. Any advice given is general in nature, and you should consider whether it is appropriate for your circumstances.
What is the flooring approach?
You probably have some ideas about what sort of quality of life you want to have when you finally stop working, but it can be hard to plan it so far out. This is made a lot more difficult when you are trying to work out how to invest your superannuation - do you invest it in safe bets or do you have a go at an investment that’s a bit more uncertain but holds a greater potential profit?
The flooring approach to retirement planning is all about finding the right balance between these two ideas. The basic concept is to work out what your most essential costs are going to be in retirement and to keep that amount of money secure in low-risk investments. Doing this means that you have a better idea of how much money you have leftover to invest in potentially more rewarding investments.
Getting started
The first thing you need to do is to sketch out the shape of your retirement. You need to know how long your retirement is likely to be and how much money you want to have on hand to cover it. This will give you a better idea of what your baseline or ‘floor’ is likely going to be. Here are some common questions that crop up in working this out:
What age can I retire?
Deciding when to retire isn’t always straightforward. For many people, the timing may be influenced by circumstances beyond their control, such as changes at work, health considerations, or difficulty finding new employment.
If you do have the flexibility to choose when you retire, the right timing will largely depend on the lifestyle you want to maintain once you stop working and the level of financial security you need to support it.
It’s important to understand the rules around accessing your super, as they depend on both your age and your circumstances.
Most people can begin accessing their super once they reach their preservation age, which ranges from 55 to 60 depending on when they were born. However, reaching preservation age alone doesn’t automatically give you access – you also need to meet a condition of release, such as retiring.
If you retire after turning 60, super withdrawals are generally tax-free. From age 65, you can access your super regardless of whether you’ve retired or are still working. These rules may change over time so we recommend you check current ATO guidance or speak with a professional adviser.
How long will I live?
While no one can predict exactly how long they’ll live, it’s still possible to make an informed estimate. On average, someone who is 65 today can expect to live well into their 80s, and potentially longer. For those who are younger, life expectancy is likely to be higher again.
This means retirement can last much longer than many people expect. For example, retiring at 60 and living into your 90s could mean funding around 30 years without a regular income. Planning with this in mind can help you prepare for a retirement that’s both comfortable and sustainable.
How much super will I need to retire?
How much super you’ll need in retirement depends on the lifestyle you want and your individual circumstances.
The Association of Superannuation Funds of Australia (ASFA) provides regular guidance on what retirees may need to support either a modest or comfortable lifestyle, based on factors such as household type and home ownership. These benchmarks are updated over time to reflect changes in living costs, so they can be a helpful reference point when planning for retirement. You can explore ASFA’s latest retirement standard to get a clearer idea of how your savings might align with your goals.
What is my retirement ‘floor’?
One way to estimate this is to review how much you currently spend each year on everyday costs such as food, healthcare, travel and leisure. From there, you can adjust that figure to reflect how your spending might change in retirement. For example, some expenses, like medical costs, may increase, while others, such as travel or hobbies, may become a higher priority.
Remember, this is the minimum amount you’d feel comfortable living on once you stop working. It’ll look different for everyone.
What do I need to do?
Now that you’ve got a rough idea of how long your retirement is going to last and what your baseline figure is, you can start optimising the management of your finances. Here are the key things to do to reach your baseline and manage any extra funds beyond that.
Consolidate your Super
One of the most important steps to take in your retirement income planning is to work out exactly how much super you already have saved. Most of us move between different jobs throughout our lives and usually, each new employer has a preferred super scheme that they recommend their employees use.
This can often mean that our super is spread out all over the place. When we're still young, we can easily lose track of this money because we know we can’t use it for a long time. This might seem hard to imagine, but billions of dollars in lost or unclaimed super has been reported in Australia.
So, when getting your future financial planning together, make sure you work out where all those little bits of super are that you’ve left behind when moving from job to job. You may find that collecting this money together will already get you a long way towards laying down the ‘floor’ of your retirement funds. | Greater Bank
Think about your Super Portfolio
The key to the flooring approach is to keep a good balance between low and higher risk investments. You should now know what your ‘floor’ is and you can work out some reliable investments towards which you can direct that amount of money. That’s your baseline and you want to feel confident it is going to remain secure - a steady return, without much risk of significant depreciation.
But you should now also have an idea of how much room you have to make potentially more profitable investments with money you are not contributing to your baseline. Make sure you seek out as much information as possible before putting your money into an investment. It is always best to talk to a financial adviser when seeking investments.
Making contributions
You might want to consider if making additional contributions (such as salary sacrifice) is appropriate for you. You might not like the idea of doing this since you're going to have less money to play around with in the present. But you should ask yourself how important it is to you that you are able to have a high quality of life during retirement, as well as now.
Making extra contributions to your super will also allow you to achieve your flooring goal sooner. This can take quite a large burden off you. When you know you’ve secured that baseline quality of life, you can start to feel more confident in investing the rest of your super more positively.
The key to a happy retirement - plan early
The flooring approach to financial retirement planning is all about putting yourself in the best position possible to have an enjoyable retirement. However, the number one resource you need to do this properly is time. The way you invest your super now is probably more important than the way you invest it five or so years before you retire. In particular, putting your baseline figure in a secure investment now will mean it will have longer to mature into something greater. Also, planning early will give you greater flexibility in making those higher-risk investments.
Your idea of what your retirement is going to look like will no doubt change over time. But if you maintain a balance between what is essential to your retirement and what is extra, you are going to get the most out of your money.