Understand the three core pillars of retirement planning (and avert financial disasters later in life)

The media is proactive and so many institutions are eager to tell you the answer. With so much mixed-messaging, how do you know who to trust and what to do next?

The equation is much simpler than it seems. There are only three questions that you need an answer for:

1. How much money do you need, and how to ensure you don’t run out of money during retirement?

2. Why is Superannuation crucial?

3. Why do you need to “diversify” your financial assets right away?

That’s it. Looks simple, right!

But most of us, if not all, don’t pay much attention to these three basic questions. Here’s why these questions might not seem “very important” at any given moment: The consequences for failing to act won’t be felt for decades. There’s only one way to avoid the consequences. Let’s become financially literate and use your knowledge to plan and live a more secure life.

That is precisely what this article is going to focus on. 

You are at the right place if you want to plan your retirement the right way. But please know that retirement planning is an exhaustive topic.

We are only going to focus on three actionable pieces of information you can apply today with expert advice, to avoid a disaster in the long term.

Step 1. Collect information about your current assets and liabilities. This includes everything, from properties you hold to the most common bill payments. Don't forget the loans and counter-productive debts like credit card debt e.g.

Step 2. Time to think and note down your expectations for the future. Think about the vacations you plan to take. Do you want to go for a new car or house renovations?

Step 3. How long will you work for? The age at which you retire can significantly impact how much money you need in retirement.

Step 4. Know what your current investments are and the exact returns you’re getting right now. What return would afford you the lifestyle you seek in the future.

Here's a simple example (a rough estimate) to arrive at a number. 

Let’s assume that you want to have $1,000 a week of passive income. So that’s $52,000. If you multiply 52 by 25, it comes to $1.3 million. So you need $1.3 million worth of income-producing assets returning you about 4% per annum, which will give you your $52,000 passive income that you’re after.

So, we all have Superannuation. But how does it work?

Let’s break down the complexity to explain what you need to know. Superannuation, or “Super" is a way Australians can save money for their retirement.

Simply speaking, your employer pays the specific percentage of your salary into a Super fund, through the Superannuation Guarantee (SG). Plus, you can also make additional contributions to your Super.

The money deposited into your Superannuation account is then invested in helping the balance grow.

Different super providers offer different levels of customer service and account access. Their fees for managing your account come directly out of your Super balance.

To some extent, you can choose how you’d like your money invested if you want to. Most super funds offer a range of asset classes in which you can invest. Obviously, it comes with different rates of risk and growth.

So when you retire, you can access your Superannuation. This is helpful since you don't have to rely solely on the age pension.

You can manage your Super fund using SMSF, and being financially literate really helps. Since Self managed Super Funds are highly regulated, you must get financial advice in this area. Ideally, you can transfer your money to different investment options within your fund at any time.

It’s all about finding the right choice with your Super fund to meet your retirement goals. Here's what to keep in mind. Be sure to keep an eye on your Superannuation payments and balance to ensure your money is working as hard as it can for your retirement.

Lots of Super funds provide online account management tools. While logging in every day is not suggested, keep a tab on what’s going on. Jump into your account once every month to make sure your employer is making your contributions. You could also assess the performance of your investments. It is something that most people miss and then regret at a later stage.

Keep a tab on the proceedings. More than a few components make Superannuation work. And you need to check the performance to help your super grow for retirement.

Many think that by investing in mutual funds that they are diversifying. That's a misconception. In fact, diversification without knowledge simply doesn't work.

So, what’s the answer?

Digging deep is a far better approach than just diversifying.

First, pick any asset class you’re interested in (real estate, commodities, e.g.)

Now dig deep. Learn all you can so you can invest intelligently (not just gambling on your Super plan.)

All this helps when you plan your Super and create an action plan to reach your retirement goals.

Bonus tip: Diversification reduces risk. The correlation between the asset loss in one asset can be compensated by a gain in the second asset to a certain extent.

Therefore the best we can do is to diversify across multiple assets that are least positively correlated (their returns move together in the same direction.)

This means both assets will not lose value or gain value together. When they are negatively correlated, their returns move in opposite directions. A loss in one asset can be compensated by a gain in the second asset to a certain extent. To sum it up, the best we can do is to diversify our investments across multiple assets or asset classes that are least positively correlated.