Turning 55 isn’t all bad. During our 50′s our earning capacity is often greater as experience has paid off with that long deserved promotion. Expenses generally decrease as well as children finish school and the mortgage reduces or is even paid off. The typical budget of someone in their 50′s is therefore often very different from someone in their 30′s or 40′s.
The main changes are:
Children’s Schooling – as children finish school, this can often save the family budget on average of $15,000 per year.
Mortgage repayments – the typical mortgage repayment is around $24,000 per year ($2,000 per month). Whilst not everyone will have paid their mortgage off by the time they reach 55, for many the end is in sight.
Travel – this is an expense that might actually increase as you get older. With children becoming increasingly dependent, parents find that they have the time and inclination to travel. An average spend in this department tends to be $7,500 per year, representing an overseas trip every 2-3 years and a few shorter domestic trips in between.
After taking into account the above changes, the typical couple in their 50′s can reduce their overall expenses by around $30,000 per year.
The differences in a typical household budget for a family in their 30’s and 40’s (left) compared to a family in their 50’s and 60’s (right). On average 30% of the family income can becomes disposable income and can be put towards topping up superannuation contributions, investments and savings before retiring over the next 5 – 10 years. How can you take advantage of these changes to your budget?
- Take up the slack… As your expenses start to decrease, take up the slack immediately by dedicating the new surplus to somewhere productive straight away. For example, if one child finishes school and you find yourself with a spare $100 per week, then consider starting a super salary sacrifice strategy or investment and dedicating this $100 per week. When your next child finishes school, ramp this up to $200 per week.
- Be strategic… mortgage payments and children’s school fees are made from after tax dollars. If your tax rate is 39%, this mean that you have to earn $163 ‘before-tax’ dollars to in turn pay $63 in tax (39%) to leave $100 ‘after-tax’ to pay mortgage payments and school fees. Once your expenses start to reduce, consider making superannuation salary sacrifice contributions instead to reduce tax and boost your super balance. Using the same example, $163 salary sacrificed to super is taxed at only 15% (versus 39%) meaning that only $25 of tax is levied (15%) for an ‘after-tax’ contribution to your super fund of $138. Not only have you saved tax, you have also built up your superannuation fund for your retirement.
- It’s never too late!… A common theme that we hear as financial planners when we meet people in their 50’s is that they think they have left their run too late. Whilst it is true that the average couple will be some $300,000 – $400,000 short of where they need to be at retirement if they don’t make contributions to their super/investments/savings, you still have time. Use the rule of thumb that for every $100 per week of ‘after-tax’ dollars that you can give up, this can turn into an additional superannuation balance of $100,000 over 10 years (using super salary sacrifice). So work backwards, if you are going to be $400,000 short of where you need to be, work with a good financial adviser/planner who can help you find $400 per week.
Getting from where you are now to where you need to be to retire is about discipline, planning, strategy and above all, finding the right ‘balance of life’. A good financial adviser will be able to provide valuable input to all of these things as well as helping you set goals and remain focused.
Written by
Michael Hogue.
