A 2012 Study conducted by fund manager Challenger identified that the average Australian is retiring with just $60,000 in superannuation.
Now many of the people retiring today have not had the lifelong benefit of employer superannuation which only became compulsory in 1992, however $60,000 is still a depressingly low figure.
While most of us will have the benefit of compulsory employer contributions to help bolster our retirement savings you can be absolutely certain that employer contributions alone will not be enough to give you a comfortable retirement.The good news is that saving for a comfortable retirement is not actually that hard and the earlier you start the easier it gets. Here are a few tips on how you can start saving for retirement:
The Earlier You Start the Better
I am always so excited to come across young people who truly understand the power of compounding because it is a lie that you need to earn a lot to become wealthy. The truth is – great wealth comes from the commitment to invest small amounts of money regularly over a 25-30 year period. Just $50 / week invested wisely into the Australian share market will have grown to over $600,000 over the past 30 years. The Australian Securities and Investment Commission (ASIC) have an excellent Compound Interest Calculator that you can use to see how much you need to save to achieve your retirement goals. The key to compounding is to invest regularly and leave it alone.
Too often we overcomplicate investing because we either get greedy or impatient. I have seen so many people try to speed up the wealth creation process by taking on too much debt or by investing in high risk investments; as a consequence they typically lose what they started with.
These days you can get cheap and easy access to the world’s share markets via Listed Investment Companies (LICs), Exchange traded Funds (ETFs) and Managed Funds. As an Investment Adviser I am a huge fan of Exchange Traded Funds (ETFs) which are a low cost way to get diversified exposure to both Australian and International share markets. You can invest small amounts regularly and set up dividend reinvestment which compounds your returns. You then need to take a long term view and continue to invest through the inevitable ups and downs. The Australian Stock Exchange (ASX) website has a lot of useful information on Listed Investment Companies and Exchange Traded products.
We all start our working life with dreams and expectations of what we will achieve financially but somewhere along the way life gets in the way, our daily living costs creep up and years can flick by without a dollar being saved. Unless we are purposeful about how we manage our money we can quickly find that our small seemingly inconsequential spending decisions start to rob us of our bigger long term goals.
Living to a budget will:
- help you identify a sustainable surplus
- set realistic goals
- track your progress
In order to be purposeful with your finances:
- write down your goals
- review them regularly
- direct all extra funds towards achieving the things that really matter to you
Attack Your Debt
In keeping with the previous tip ‘be purposeful’, I challenge all my clients to be aggressive about paying down their debt. One of the biggest wealth destroyers of generation X and Y is our ‘cruisey’ attitude towards debt. We are taking on bigger and bigger loans and make little or no effort to pay them down ahead of time. The average Australian first home owner loan is now $385,000. If you allow this loan to run the full 30 year term you will pay almost $360,000 in interest to the bank assuming an interest rate of just 5%. I should actually say when interest rates get back to their longer term average of 7.5%, the interest on the same loan over 30 years would be over $535,000. That’s $535,000 of your hard earned after-tax money going to the banks. I am not happy to let this happen and neither should you be.
If you have a home loan don’t get comfortable with it, make an effort to pay it down fast.
If you simply double the principle component of your home loan repayment each month, you will pay your loan off in 15 years instead of 30 and in the process save yourself $300,000 in interest.
The above assumes a 7.5% interest rate. If you are in your 20’s, 30’s or 40’s, make paying off your home loan and any other debt your priority. With a determined focus most people can pay off their home loan in 10-15 years. Once your home loan is paid off then you can turn your attention towards saving for retirement, channelling what was your monthly home loan repayments straight into a sensible long term investment plan.
Saving for retirement does not need to be complicated but you can’t look at it in isolation to the rest of your finances. Financial success comes as a consequence of being purposeful in all aspect of your financial affairs. Living to a budget, aggressively paying down debt, and investing wisely are all essential components of a strong financial future. But the biggest key is time, there will never be a better time to start than today.