- Your super may not pay for the retirement you’re imagining. Check it today.
- Investing outside of super can boost your retirement savings, without locking your money away.
- The sooner you start, the less you need to put aside to pay for the same life.
Freedom and leisure. It’s what we want all for life after work. We’ll live in a lovely home, visit family and friends, travel overseas and enjoy all those activities we don’t have time for now.
It’s a grand dream.
We assume our super will pay for all of this, but strangely, we don’t stop to check if this is true. In fact, 4 out of 10 Australians don’t know how much super they have right now let alone whether they’ll have enough to live on in 20 or 30 years’ time.
To be fair, it’s pretty hard to work this out. First, you’ll need to:
- Have a clear mental picture of your future lifestyle,
- Know the future cost of everything,
- Predict the exact moment of your death (clue: Australians live longer than nearly everyone),
- Calculate how your savings will both grow (thanks to interest) but also deplete over the course of your retirement.
Thankfully, this independent retirement planner can help with the maths. Do yourself a favour and take 10 minutes to see how you’re tracking.
How much do I need for a comfortable retirement?
Did you know, the amount needed by a single Australian to pay for a “comfortable” retirement is benchmarked at $545,000? That assumes you’re 65 today when you retire, live for another 20 years, receive the Age Pension, stay healthy and … here’s the clincher… own your home outright before you retire.
If you’re 35, for example, that number rises to $1,177,111, to take into account inflation (at 2.6% per year). You’ll need more still if you’d like to enjoy a more luxurious retirement.
What can I do if the numbers don’t add up?
Actually, quite a lot.
Making additional super contributions will make a big difference and has significant tax advantages too. It’s a great place to start. My wife and I take advantage of this, and it can usually be set up so it comes directly out of your pay so you don’t really notice it’s gone.
Investing outside of super can also help boost your retirement lifestyle, plus has the advantage of not locking away your cash. This gives you options if you want to retire earlier or decide to use your money to start a business or the like. And investing has never been easier.
If you start now, you won’t have to save as much, because the power of compound interest will do some of the heavy-lifting for you. (Yep, Einstein was right, it’s easily the 8th wonder of the world.)
Let’s be conservative and assume you’re a 35-year-old woman, earning an average wage* (of around $85,000 per year, based on recent ABS data). Based on the retirement benchmark you need to buy a home, pay off your mortgage AND save $1,177,111, before you stop work.
You’re likely to retire with around $845,561^ in super (or $391,493 in today’s dollars). Not too far off where you need to be.
Start investing today to close the gap
If you start investing now – for example in an investment portfolio which earns 7% average annualised returns, after fees – you need to put aside around $270 per month or less than $63 a week. Or invest a lump sum of $43,494 to make up that shortfall. That’s not too higher bar to enjoy a more enjoyable retirement. Achieve even better returns, and you’ll get there faster, or be able to enjoy a flight upgrade or three. (Our Growth portfolio, for example, has returned 8.85% average annualised returns since inception, between 30 June 2012 and 28 February 2018.)
However, at 55 – to reach the same goal – you have to put aside around $1,904 per month or invest a lump sum of $168,465.
The 35-year-old you puts aside $97,200 in total; while the 55-year-old you has to find $228,480 to pay for the exact same life after work. That’s because the interest you get on your investment is re-invested and compounds over time. Without you lifting a finger.
Small changes you make right now can transform your life in the future. As the Chinese proverb goes: The best time to plant a tree was twenty years ago. The second-best time is now.
*Yes, ideally this would be a median income figure. I dug around on the ABS website looking for median income data split by gender and age and couldn’t find anything, so had to settle for average income. The median income of a 35-year-old female would be less than $85,000 as the data is skewed by a few high-income earners, like Miranda Kerr.
^ A few notes on the retirement calculations and assumptions. We’ve aimed to make realistic assumptions, using the ASIC calculator, which are as follows:
- Investment returns: 7% average annualised return per year
- Investment fees: 1% per year
- Tax on earnings: 6% per year
- Starting super balance: $40,000 (based on the mid-point of the AFSA report on super balances by age/gender)
You can change the assumptions to match your circumstance.
© Morningstar Investment Management Australian Limited (‘Morningstar’) and any related bodies corporate that are involved in the document’s creation. Whilst all reasonable care has been taken to ensure the accuracy of information provided, neither Morningstar nor its third-party providers accept responsibility for any inaccuracy or for investment decisions by any person on the basis of the information included. Past performance is not a reliable indicator of future performance. Morningstar does not guarantee the performance of any investment. Any general advice has been prepared without reference to your investment objectives, financial situation or needs. You should consider the advice in light of these matters and if applicable, the relevant disclosure document before making any decision to invest. Refer to our Financial Services Guide for more information.