One of the biggest financial things we need to be aware of is how we're going with saving for retirement.
A huge chest of money doesn't suddenly appear out of thin air when we reach 70. To get to a good retirement pot we need to save for it our entire lives.
How much do you want or need to have in retirement? I think a large part of that question relates to what interest rates will do over the coming years. If they stay at the current level then we probably need a much higher starting retirement balance than people in previous decades.
A safe withdrawal rate might be 3%, or it might be 4%, who knows? If you want to safely spend $60,000 a year in retirement it could take a $2 million or bigger portfolio. I think most young people need to be aiming for $1 million at the very least because of how different economic conditions are now compared to the past.
So how much do we need to save to hit $1 million or more? Over the past few decades the average share market return has been 10% per annum. Some people believe that's going to be hard to match because interest rates have been dropped for the past three or so decades, which obviously can't be repeated again.
Future returns from Vanguard MSCI Index International Shares ETF (ASX: VGS) and Vanguard Australian Share ETF (ASX: VAS) are more likely to be in the single digit realm, particularly from the current high valuations.
So, if share markets only return an average of 7% a year from here and you put $1,000 a month towards retirement, after 30 years you would have $1.2 million. Not bad at all.
Obviously if you save more per month you would have more for retirement. If you have longer until retirement (than 30 years) you can save more. If you can find investments that return more than 7% a year you will get more for your retirement – that's one of the main objectives of picking your own shares.
