April 29, 2024

Balancing your Retirement Income & Expenses As An Expat

In life, one of the significant financial challenges we face is funding our retirement. Common concerns include: “Do I have enough money to retire comfortably? How much monthly income can I realistically expect once I’ve retired?”

These concerns are reflected in the recent World Economic Forum's “Living Longer, Better: Understanding Longevity Literacy” report. The report revealed people are generally unaware of how they will achieve their target levels of retirement income. Meanwhile 55% of respondents believe they do not, or will not, have enough savings at the point of retirement.

However, with an understanding of your finances, a little discipline, and some well-thought-out financial planning, it is possible to secure your retirement. The key is to be proactive and take a methodical approach to saving and investing, with a view to building sufficient wealth over time.

In this article, I will review both the key sources of income you ought to be aware of and likely expenses you need to prepare for. I will also explain how Melbourne Capital Group can help you secure your retirement.

What are your sources of income?

A cornerstone of successful retirement planning is identifying the desired level of income needed to support you and your family in later life and then establishing what your income sources will be.

There are various retirement income sources, knowing what they are and understanding how best to utilise them to ensure you have a robust, reliable and regular cash flow that allows you to fully enjoy your retirement.

Pension income

Pension income is the pot of money you have built up during your working life that will pay regularly once you retire.

The income you receive from your pension will be determined by the type of pension or retirement account you chose, how much you contributed, and how you are taxed when you draw down from the pension.

The main categories of pension are:

Defined benefit pension: Sometimes referred to as a “Final Salary” pension, a defined benefit pension provides a guaranteed retirement income based on a formula typically linked to salary and years of service. However, it’s worth noting this type of pension has become a rare benefit today with fewer employers offering it.
Defined contribution pension: Retirement income is based on contributions made by both employer and employee over time, investment returns, and account balance at retirement.
State pension: Regular payments provided by the government to eligible individuals upon reaching retirement age.

Personal savings and investments

Although a pension will provide a regular source of income, in most cases this income stream alone will not be enough to sustain a basic standard of living. Furthermore, as an expat or someone who has lived and worked abroad for the majority of your career, you may not have had the opportunity to participate in a formalised pension scheme.

As such, it’s prudent to seek out and create additional sources of income.

Additional income streams include:

Retirement savings accounts: Accumulated savings in retirement accounts such as Individual Retirement Accounts (IRAs) or Self-Invested Personal Pensions (SIPPs).
Investments: income generated from investments such as dividends on stocks, interests on bonds, other interest-bearing investments, capital appreciation on mutual funds, real estate, etc.
Savings: funds saved in bank accounts, savings accounts, or other liquid assets.
Immediate annuities: purchased with a lump sum and provides guaranteed income payments for life or a specific period.
Deferred annuities: accumulate funds over time and provide income at a later date, often used as a retirement income stream.

Having a combination of savings, pensions and a well-balanced and diversified investment portfolio is a sensible approach to building a sustainable and reliable retirement income.

However, this formula is by no means the only way to achieve financial independence later in life. Further ways you can generate income during retirement include:

Part-time work or consulting: income earned from part-time employment, consulting work, or freelance activities during retirement.
Rental income: income earned from rental properties or real estate investments.
Income from business ownership: income derived from owning and operating a business, either actively or passively.
Inheritance: inheritance received from family members or loved ones, including financial assets, property, or other valuables.

Your expenses will dictate your lifestyle

Calculating the total cost of retirement will vary depending on your circumstances, personal preferences and lifestyle.

It is also worth noting your retirement will cost you more than you bargain for due to the effects of inflation.

When calculating the cost of retirement, most experts recommend using the 80% rule, whereby you need 80% of your pre-retirement income to maintain your current lifestyle.

However, the 80% rule does not necessarily tell the entire story. A good approach is to identify your essential and non-essential expenses.

Essential expenses

Your essential expenses are necessities that are ongoing and non-discretionary. These include food, housing, transportation, utilities, healthcare, taxes and any other essentials and should be covered first through your consistent sources of income.

Healthcare will likely be one of your largest and most unpredictable retirement expenses. It is therefore imperative you protect yourself from unforeseen expenses by taking out a comprehensive expat healthcare policy. Unlike normal health insurance, international health insurance provides coverage regardless of where you are living.

Non-essential expenses

Non-essential expenses can be ongoing and one-time expenses. These can range from travelling to purchasing big ticket items such as a car, holiday home or even tackling major home renovations in your existing property to make it more suitable for your new lifestyle.

Balancing your income and your expenses

Once you have a realistic outline of your sources and level of income and an idea of expected expenses when you reach retirement, you should be able to make an honest assessment of whether you are on track or whether you are heading towards a shortfall.

As an expat it’s important to consider whether or not you will qualify for a State Pension from your home nation, and ensure that any old workplace pensions are consolidated and working for you, as these two income streams can often account for a significant portion of your reliable cash in retirement.

Creating your roadmap to retirement with Melbourne Capital Group

We will talk to you about your retirement aspirations and conduct a deep dive into your finances to understand your obligations, savings, pre-existing workplace pensions, investments and assets. We will then create an accurate forecast for your retirement by carefully reviewing your expenses and income.

With a forecast in place, we will help you create a resilient, robust and personalised retirement roadmap, setting out achievable savings and investment milestones. We will harness our expertise to help build your wealth, creating strategies for income generation. We can also manage your pre-existing wealth, engaging your assets so they are working to support you.

We are specialists in international retirement planning. As an expat, you may have pensions in other countries or you may hold savings and assets internationally. We can help navigate likely complications, consolidate existing pension pots and help manage your international assets to maximise income while minimising tax liabilities.

Once your comprehensive plan is in place, we will continue to work in partnership with you to keep you on track, securing your retirement.

Whether you are taking the first steps toward planning for your retirement or are further ahead in your life and career and are seeking to complement an existing plan, we can help.

Email me at kalmurray@melbournecapitalgroup.com to begin your journey to financial success today.