The challenges most of us face include buying a home and paying it off, raising a family, and saving enough to retire on. Buying a home used to be the biggest expense most of us would face, but that’s no longer true.
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With very low interest rates and a savage Centrelink Assets Test, the amount now required to fund a comfortable retirement is greater than the cost of a home.
Several factors affect the amount needed for retirement. How much income will we need in today’s dollars?
We may have a budget or an estimate based on take home pay. Inflation must be allowed for. If we want $50,000 in today’s money that will be $105,000 in 30 years at 2.5 per cent annual inflation.
Our attitude to risk, investment fluctuations, is a factor. Do we want stable, secure investments or will we accept things that fluctuate more but usually earn higher returns long term? If we want stability we must save more.
Will we be happy to spend our capital in retirement or will we aim to leave assets after we are gone for our family? If we plan to spend our savings then we don’t need to save as much.
Preparing an illustration requires many assumptions such as inflation, wage rises and earning rates. Suppose a couple are 30 years from retirement, earn $100,000 per annum jointly and have $50,000 each in super. They are happy with growth funds while accumulating.
They want $50,000 annual income in retirement and would like a balanced portfolio then. They hope not to spend their capital. With 2.5 per cent inflation they will need $105,000 annual income in 30 years.
If they draw 4.5 per cent annual income from their balanced portfolio they will need $2.33 million in retirement savings. Drawing 4.5 per cent should mean the value doesn’t run down.
With only $100,000 saved so far $2.33 million is a huge target. By far the easiest way to achieve it will be by small, regular savings amounts over 30 years. Fortunately compound interest will be a huge help in the challenge.
To reach the goal our couple need to contribute about 12 per cent of their pre-tax income to super. Their employer is putting in 9.5 per cent so they need to salary sacrifice an extra 2.5 per cent, $2,500 per annum or $50 per week and increase that as their income rises.
This is a ballpark estimate only as there are too many assumptions and variables for it to be reliable.
It provides a sound starting point for the 30-year journey but progress will need to be monitored regularly and adjustments made over time based on good ongoing advice. Each person’s needs and circumstances are different so personal advice is essential.