It's official.
To have a comfortable retirement, you will likely need at least $1 million in super when you retire.
Given the average person is expected to have around $200,000 when they retire – according to research by annuities specialist Challenger Ltd (ASX: CGF) in 2012 – clearly many of us need to make more of an effort to ensure we hit the $1 million mark by the time we hit retirement age.
Here are several steps you might want to consider if you'd like to look forward to your retirement:
Continue reading, or get our free 10 Step Guide to Making $1 Million report right now.
The government wants to help
The good news is that the Australian Securities & Investment Commission (ASIC) has several tools to get you started on the MoneySmart website, including a superannuation calculator and a retirement planner.
Plug in your current savings, superannuation and other personal details into the superannuation calculator and out comes how much super you will have at retirement, as well as the impact fees will have on the final amount.
Over the long term, you could reasonably expect to generate returns of around 10% per year from Australian shares according to Vanguard (which includes the bad years and events such as the GFC). That figure is similar to other research conducted by the likes of the ASX and some investment banks. It also happens to be well ahead of cash, property and any other asset class (but more on that later).
If you come up short (and many of us will), there are a number of steps you can take to increase the amount.
Superannuation
The good news is that superannuation is a very tax-effective vehicle for retirement savings. There's virtually no tax on your superannuation income once you retire currently, so it makes sense to plough as much as you can into super and allow the magic of compounding to do its trick.
Your employer should be contributing 9.25% of your total salary into the superannuation system for you. If you haven't chosen a low-cost fund yet, you really should make that a priority now. You can also make additional contributions through salary sacrifice or from your after-tax income, but just watch out for the cap limits.
If you want total flexibility and control, setting up a self-managed super fund (SMSF) is an excellent idea. There are several providers who can do this for you very cheaply, especially if you are prepared to do some of the admin work yourself.
As I outlined in this series of articles, it's quite simple to replicate a standard 'balanced fund' once you have set up your SMSF, and easy enough to move up or down the risk and return curve by changing some of the asset class percentages around too.
Savings
If you think you're doing as much as you can inside super, then it's time to look at what you can do outside.
Firstly, the best way you can ensure you are on track for $1 million is to cut your debt, particularly high-interest debt. There's absolutely no point aiming for 10% a year through investing when you are paying 20% interest rates or higher on your credit card balances.
Give your credit cards the flick.
Spend less than you earn
Secondly, spend less that you earn. That might sound like a no-brainer, but you'd be surprised by how many people either live week to week or spend more than they earn. One way you can do this is to set aside a specific amount for savings every pay, before the bills and other expenses.
Investing
Then you need to put your regular savings to work.
But leaving it in the bank won't help. At current deposit rates of around 3%, a $10,000 deposit will turn into $43,839 over 50 years. You might think that's good, but if you instead put that same $10,000 into shares, you'd end up with $1,173,909, if you achieve the long term average rate of 10% a year.
Of course, not everyone has 50 years before retirement do they?
If you have 30 years left before retirement, your $10,000 would turn into $174,494, so clearly it is critical that you continue to add to your savings. If you added $450 each month, you'd still manage to hit more than $1 million in 30 years, ending up with $1,062,762.
That clearly illustrates the benefits of time and the compounding effect. The earlier you start, the better your result.
If you want our free 10 step guide to making a million in the market -> Click here
What if I'm 50 or over?
Now if you're around 50, you only have about 15 years before retirement, so you definitely have some work to do. The good news is that it is achievable. In many cases, you are starting out with a bigger initial deposit and may be able to contribute more over time.
In fact, if you have just $50,000 in superannuation and you add $25,000 each year for 15 years, you'll end up with more than $1 million in your super fund.
Now you might be asking, "Where am I going to get $25,000 from?" Well, don't forget your employer superannuation contributions. Someone on $80,000 should be getting $7,400 paid into their super for them each year to start. Unfortunately, the rest is going to have to come from you, so if you haven't already fired up a web browser page and jumped on the MoneySmart site, now's a good a time as any.
What are you waiting for?
