25 Jan 2019
When it comes to planning for your retirement, you need to start when you’re young. That’s why it’s called investing for retirement – it’s something that you work for years to achieve before you reap the benefits. However, there are two questions that commonly arise:
1. When should you start planning for retirement?
2. How much do you need for retirement?
When Do You Start?
The simple answer is: as soon as possible. When you start earning a salary, it’s recommended that you start putting money away immediately. Remember the story about the tortoise and the hare? The tortoise beat the hare in a race because the hare did nothing and relaxed for hours. Meanwhile, the tortoise made slow and steady progress – and won the race. If you spend too much time putting your retirement savings off, it might be too late when you start.
How Much Do You Need?
Answering the question of how much you need for retirement requires you to do some calculations. First, ask yourself what standard of living you expect. Do you want to move to a smaller home? Will you want to travel abroad once a year, or do you want to be able to visit your kids in another state over Christmas and for their birthdays?
Next, estimate your expenses during retirement. Remember to factor out certain expenses that won’t be relevant by that time – for example, will your mortgage be paid for? Will you be living somewhere more affordable? If you’re paying school tuition now, you won’t have to factor in that expense at a later stage.
Your expenses should include enough money to maintain your home, health insurance and medication, travel expenses, basic living necessities such as clothing and food, utility bills, hobbies, and entertainment. You can calculate it annually, to give you a lump sum of how much you need for retirement per year, or monthly if that’s easier for you. Lastly, add inflation costs to your calculations.
Investing for your retirement might be a pain in the neck now, but you’ll be happy to have put in the effort when you’re living out your dream lifestyle. Start as soon as possible, calculate realistic expenses and remember, be the tortoise!
Despite interest rates being low, debt stress is at record highs. Banking data shows that on average Principal and Interest repayments currently take up 42% of household income. As a result, banks are becoming concerned about what will happen when rates start to rise?
Increasing pressure from APRA and the Royal Commission, have made the ability to refinance loans considerably harder. Clients that have never had an issue obtaining a loan in the past are being heavily scrutinised and even having their applications declined.
Banks appetite for Interest Only loans have also decreased significantly. Many clients are finding that when they try to extend their Interest Only (I/O) term, that the banks are not accepting their request. If you have an investment property, paying principal and Interest (P&I) payments can have a significant impact on your cashflow and wealth strategies.
To make things worse, most banks have also changed the way they assess applicants ability to afford the loan (Serviceability). Instead of relying on an average living expense formula for couples and families, they are now wanting to see your personal bank statement transactions and a accurate budget.
If you’re like most people, you spend pretty much what comes in and your budget is set based on your bank balance. If interest rates went up you would just adjust your spending. Unfortunately, this type of budgeting is going to make it very tough when you apply for that next loan.
What can you do to prepare?
To ensure a smooth transition to Principal & Interest Repayments or rollover to another Interest Only period the following tips might help;
- Make a budget that proves you can afford P&I repayments with a 2% interest rate rise. Make sure its comprehensive, and don’t forget to include things like your drivers licence renewals and an amount for when your fridge blows or when you need to replace furniture. You might not need it this year, but next year you might.
- Stick to the budget. The banks review 6 months of transactions and if you broke the budget, they will know. An easy way to do this is by opening separate bank accounts for your discretionary spending. For example, Groceries, Gifts, leisure / entertainment, children, etc.
- Don’t leave it to the last minute to renew your Interest Only term. Speak to your broker or your bank, at least 3-6 months before the Interest Only term finishes. This will ensure that you have time to review your options and adjust your budget before you need to apply. It will also give you time to sell if affordability is an issue.
- If you do have to change to P&I, review the viability of your investment strategy. It may no longer be the best option, especially if you still have debt on your principal residence.
Puddle 2 Pond Financial is a Financial planner Nowra and has been in operation since 2012. We see clients at our office in Nowra and provide a mobile service in the Illawarra and Wollongong region. We specialise in helping clients with budgeting and implementing strategies so they stick to it. If you’re a little overwhelmed and would love some help, give us a call on 02 4424 0479 …. We’d love to help.