In my 13 years of working with people and their relationships with money, I have always sought the simplest ways to ensure my clients have enough to live off in retirement. In a world full of complex ways to manage money and endless investment paths to choose from, it’s no wonder many people are not sure on how to proceed.
Having a simple approach could well mean the difference to you enjoying a comfortable retirement or not. And I’d like to outline this approach in a moment, but first some background.
Are we are really a country of savers?
There’s been a lot of talk in the media about people turning back to saving right now. But a recent ABS study has shown that the average Australian is saving just 4% of their household income for their future. On average during our working lives (18 to 65) most of us will earn around $3 million just in salary alone. This means the average Australian is saving just $120,000 in total over a lifetime if all their saved funds are kept and their savings keep pace with inflation.
Is compulsory super the solution?
In 1992 compulsory superannuation began with 3% of an employee’s salary being paid into a super fund. Since then compulsory contribution limits have been progressively increasing to the current rate of 9%. The good news for employees is that it will soon rise to 12% per annum. But will that be enough? In the table below, are examples of how Australians are faring with their retirement savings since the introduction of the superannuation system.
How much is enough savings for retirement?
Few people really know how much money they will need to live on for a comfortable retirement, and how much they must save and invest now to reach that goal in retirement. The Westpac-ASFA Retirement Standard indicates that a retired single person requires approximately $36,000p.a. to live comfortably, where as a retired couple needs $49,000p.a.
In order to have the $36,000p.a required for a retirement that will last to average life expectancy, a person would need to have saved around $410,000 when including Age Pension entitlements for a single pensioner.
For a couple to achieve their income goal for a comfortable retirement of $49,000p.a. they would need a super balance of around $730,000 in super plus pension entitlements.
Now if you don’t want to get involved with government pensions and all the rules that go with them, and you wish to be a completely self-funded retiree the super targets for singles and couples rise to $900,000 and $1,225,000 in today’s dollars respectively (assuming a 4% income which can be generated on the money in almost any market condition and assuming that the lump sum was to be passed on to the next generation.)
As you can see from the above table most Australians are way off these marks. There is a huge gap between the targets to achieve a comfortable retirement and the average balances most people currently hold. So for the majority of Australians a push towards planning for retirement is essential – there is little time to waste!
After reading this, it is easy to be discouraged by the amount you might need to accumulate but it’s not as bad as it seems. The solution can be simple.
The simplest path to avoid not having enough money saved for retirement is to establish a consistent savings habit throughout our working lives that pushes money towards investments that will produce our future income. This exercise will sow the seeds for your future retirement and when regularly review ed can also motivate you to invest more and more.
A small amount in a regular savings/investment opportunity can add up pretty quickly. For example, if you save just $200 per week for 5 years and it earns 5%, you will have saved $60,386! That’s not bad considering most of us will be working a lot longer than 5 years. This outcome can be dramatically improved by investing in assets that outperform the cash rate. There are also some smart strategies out there for getting more from your income, such as salary sacrificing. This can increase your savings even further by accumulating pre tax money.
At Investors Direct we have been running a program teaching friends, family and clients to manage their money better for several years. One of the simpliest ideas that underpins our program is to save your money first. If $200 per week savings is enough to get you a comfortable retirement then why not find a way to pay it into savings before your income even lands in your account. You cannot spend what isn’t there and amazingly you probably won’t even notice it missing ☺.
So in summary, the average Australian does not have a large pool of money waiting for them when they reach retirement. But if you take the time to get advice on exactly what you need to retire with the lifestyle you want, then you may just find out the solution is simpler than you think.
The average Australian needs good advice on how to steer their financial situation towards a comfortable retirement. A great adviser will understand that good training and a consistent strategy will do more for someone getting to a comfortable retirement than any product they could sell.