One of the biggest concerns that people have about retirement is that they don't know how much will be enough to secure a comfortable lifestyle 20 – 40 years from now.
And you don't want to be finding that out when you're in your 60s, staring into the realities of retirement.
With longer life expectancies, there is also a chance that you may even outlive your superannuation and savings. That is causing Australians approaching retirement a lot of worry as well.
Setting your investment goals as early as possible is the best way to create your retirement wealth. Here are three general rules of thumb investors can use to guide their planning.
1) 8 times your salary by retirement age
The US investment firm Fidelity Investments recommends that you should have about eight times your annual salary saved up by the time you retire. Investing is your best option for reaching that goal. The stock market's long-term average return is about 12%, but even 8% could work.
For example, if you invested $500 every month for 30 years and achieved an 8% annual return compounded monthly, you could have a portfolio value as much as $745,000, according to the moneysmart.gov.au website calculator.
2) Replace 80% of your salary with passive income
Replacing 80% of your salary means having a source of income for possibly another 25 – 30 years. You may not need as much money to cover expenses in retirement, especially if you own your home outright, but the cost of living will be higher several decades from now.
A stock portfolio can provide ongoing passive income from dividends and share price gains. In contrast, a regular superannuation fund pays out over your retirement years, but the principal is reduced over time. That could create a short-fall.
That's why investors buy strong dividend stocks like Suncorp Group Ltd (ASX: SUN), or some of the big four banks such as Westpac Banking Corp (ASX: WBC). They have growing, sustainable businesses that will be around for many years.
3) Save or invest 15% of your monthly income
Here's where it all starts. Everyone needs to learn to live on less and pocket the savings. Saving 15% of your income and investing it diligently will help you build up eight times your salary by retirement.
Start early in your career years and reap the benefit later on. The real gains come from the power of compounding on your portfolio returns.
One way to increase your portfolio value is to hold fast-growing stocks like SEEK Limited (ASX: SEK) or Domino's Pizza Enterprises Ltd. (ASX: DMP). Over time they can also increase their dividend yields as they become mature businesses.
