Many retirees are leaving retirement planning until 5 years, or even 5 months or 5 days, before retirement.
Leaving retirement planning until just before retirement is the equivalent of making interest only repayments on your home loan and thinking: “I’ll just deal with the principal repayments 5 years before retirement”. By that stage you have very little chance of being able to achieve much. The result is that many retirees are facing significant pay cuts and therefore adjustments to their standard of living at some stage in retirement. Thinking about it now, could you live off $20,000 less each year than you are currently living off? This is the issue many retirees are facing.
You will need to pay yourself in retirement; for many people this will be for 20 to 25 years. If your current expenditure is $60,000 pa (excluding mortgage payments or rent), then that is $1.2 to $1.5 million in today’s dollars over the life of your retirement. Depending on how old you are, inflation will significantly increase this amount. This is a massive liability that you need to start to save for.
Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t, pays it”.
This could be the some of the best financial advice you ever receive. The earlier you harness the power of compound interest, the less work you need to do yourself, via additional savings, and the more work compound interest does for you. Just as small changes and additional repayments to your loan can result in massive interest savings over the life of your loan, small changes and additional savings to your super make retirement planning significantly easier.
By way of example, Sarah is age 35 with a superannuation balance of $55,000 and wage of $60,000 pa. She could increase her super balance by over $350,000 at retirement by making additional contributions to super of $20 per week and increasing her long term return by 0.8% pa.^ Of course, everyone is different, so you should seek personal advice in relation to your own super and retirement planning.
Whether you are 10 years from retirement or 40 years from retirement, you need a plan to ensure you are able to continue your current standard of living through retirement. It is never too late or too early to start planning.
To discuss your superannuation and retirement planning, contact Sam Campbell at Luka Group on 02 6883 2200 or .
^ Note: Additional returns may be able to be gained through increases in allocation to growth assets or rolling over to a lower fee super fund, however this increase in return is not guaranteed. The increase of 0.8% is based on the difference in return assumptions for portfolios with 70% growth assets and 100% growth assets. Therefore, those who already have high growth allocations are not likely to be able to increase their super funds potential return. In addition, high allocations to growth assets may not be appropriate for your own risk tolerance and the lower fee super funds are not necessarily better than your existing super fund. You should seek personal advice in relation to your own super and retirement planning.
