Your Money

How to make your wealth last a lifetime

- March 22, 2021 4 MIN READ

It’s one of those financial nightmares we all hope doesn’t come true… running out of money in retirement. Outliving your wealth adds an unwelcome level of stress at a time when you’re financially vulnerable.

Without a regular income stream from a wage, and limited employment opportunities, it is near impossible to rebuild if you run out of cash during retirement. Here are our top strategies to ensure your wealth lasts a lifetime… or even longer.

1. Plan, plan, plan

The first step is to understand the threat, think about it, and plan on avoiding it. One of the biggest mistakes people make is they leave it too long to understand running out of money is a real possibility.

The earlier you understand the threat, and plan for it, the easier it will be to avoid because you have time on your side. Through the magic of compounding returns (earning a return on previous returns/interest on interest), your wealth can grow enormously through making little regular additions over the long term.

It could be making a habit of adding your tax refund, work bonus or other windfalls to extra superannuation contributions each year. Go to the calculators on your super fund’s website to see how much extra you’ll retire with from making these additional contributions.

Good tips here: 10 tips to build wealth and keep it

2. Know your ‘number’

In other words, know how much you need to retire with. Again, the earlier you work this out the better because it is the key plank of the planning process. Your superannuation or bank websites have retirement calculators where you punch in what you think you’ll need in income and it comes up with the retirement total needed.

A word of warning here. It’s our experience that most Aussies seriously underestimate their retirement income needs and the costs they’ll incur. So be conservative.

Work out how long you’ll be retired for (yes, it’s hard to predict when you’ll die, but start by looking at your family’s longevity genes and add a few years for safety). Do an approximate cost budget, then do the maths. Remember the travel budget of most retirees blows out in the early years, as does the health budget in the latter years of retirement.

A general rule of thumb from the experts is to plan a budget at around 85 per cent of your pre-retirement income. Assume social security support as a back up safety net, rather than a central plank of retirement funding, because it will be increasing difficult to be eligible for the aged pension.

3. Review your retirement investments – constantly

By constant, we mean every 6-12 months, not every week. Most average Australians invest in their home, their super and a portfolio of blue-chip shares, either directly or through managed funds. A sort of set-and-forget strategy.

We agree with the “set” bit, but not the “forget”. Regularly monitoring the performance of your investments, against comparable alternatives, and the fees being charged is absolutely essential.

Don’t constantly chop and change, but be aware of underperformers that drag down returns. Due to compounding, this will magnify over time and hit your retirement payout hard.

Also check the skew of your superannuation depending on age and time to retirement. Take chances early, when you have time to recover from setbacks, and be more conservative the closer to retirement.

Related: Retiring in style is all in the planning

4. Have a plan for taking money out of superannuation

Much of the focus always centres on stacking money away for retirement, but getting it out can be just as critical. A pre-retirement, or transition to retirement strategy, needs careful planning and professional advice.

Everyone is different, so a tailored plan reflecting superannuation balances, outside super investments, debt levels, spending habits and future goals is critical.

Issues like early retirement expenses (travel etc) and the balance between a lump sum payment and pension income stream are important decisions. There can be huge tax consequences as well if the right decisions aren’t made.

5. Prepare for financial shocks

They can come in all shapes and sizes… everything from losing a job or incurring a long illness, to major car repairs and replacing the fridge. But an unexpected financial event can have a devastating impact on your wealth building plans.

The fact these events are a surprise make them hard to plan for, but something will inevitably happen. Which is why building a buffer for the unexpected is always a wise decision.

Apart from appropriate insurance cover, a lot of experts suggest putting aside six months worth of salary to counter unexpected financial shocks. Put this amount in your investment portfolio or in the redraw facility of the home loan so that it is always earning a return while not being used.

Read more: 5 financial mistakes you didn’t know you were making

6. Watch your spending and consider downsizing

With wage rises subdued, it has never been more important to live within your means. Remember it’s the surplus income after expenses which is used to invest and build wealth. The more you watch your spending, the more that’s left over to put to work on your future financial security.

As you move out of the high-expense raising a family era, downsizing assets and expenses can make a massive difference. So do it sooner rather than later.

7. Think carefully before gifting to children

Done properly, getting access to superannuation on retirement can be the biggest windfall most Australians will ever experience. The payout can be huge so many make the mistake of thinking “that’s more than I’ll ever need”. They then start looking to help adult kids out with financial gifts to buy houses, cars and businesses.

It is a mistake because you can never be quite sure whether that huge windfall will indeed be enough. Those unexpected financial shocks can come from anywhere.

So be careful with gifts to anyone. It may seem a nice thing to do at the time, but make sure you can get the money back if needed.