September 05, 2017
We can all take a few simple but effective steps throughout our working lives to build wealth for retirement. The key is to focus on your home, your super and investments held outside of super – and work towards the lifestyle you hope to enjoy.
The day will come when you finally stop working, and the commitment you have made to those small yet valuable steps will pay off.
We look at what’s involved to ensure you have enough money to live your personal retirement dream.
For much of our working life retirement can seem like a long way off, and as time goes by it’s easy to get caught up in the day to day moments – buying a home, starting a family, raising children. Planning for retirement is something we know we should be doing but in our busy lives it can get pushed to the back burner. Moreover, for many Australians the question of how much money we need in retirement is a real grey area.
Key benchmarks are a guide not a given
The ASFA Retirement Standard is a popular benchmark for retirement saving. As at March 2017 it shows single home owners need around $545,000 to enjoy a comfortable retirement, a figure that rises to $640,000 for a couple1. This would ensure being able to pay bills, enjoy a few vacations and maintain a house and car. Importantly, these figures assume that retirees own their home outright, without a mortgage left to pay.
A key pitfall with these sort of benchmarks is that a ‘comfortable’ retirement is a very individual concept. For some retirees for instance, a dream holiday involves spending time in a caravan by the sea. For others, it’s a round-the-world trip.
This being the case, there is no one-size-fits-all magic number we should all be working towards. Rather, it’s a matter of thinking about the sort of retirement lifestyle you’d like to enjoy and deciding how much you’ll need to achieve this goal.
One issue to be mindful of is increasing life expectancy. It’s long been assumed that the early years of retirement are the most active and therefore the most expensive. But greater longevity and better health means many of us could still be leading active lifestyles well into our seventies and eighties.
Long term planning is the key
Building wealth for retirement is more achievable when it’s a gradual process that we follow from an early stage. New restrictions on the amount we can contribute to super each year reinforce this notion, so it pays to have a long term plan to grow a nest egg. Despite this, almost six out of ten Australians don’t have a financial plan in place2, which goes a long way to explaining why one in two workers don’t believe they have done enough to reach their wealth goals3.
Three areas to focus on
There are simple, effective steps we can all take throughout our working lives to become financially secure in retirement. The secret to success is to focus on several main areas: Your home, your super and investments held independently of super.
1. Aim to own your home debt-free at some stage, preferably by the time you retire. Steadily paying down your home loan also helps to build equity, which can be used to fund an investment property to further boost wealth.
2. Embrace your super from an early stage by consolidating multiple accounts into a single fund, and take advantage of tax breaks to grow your nest egg using before-tax super contributions.
3. Importantly, explore other non-super investments. Quality shares for instance provide useful tax breaks on regular dividend income and long term capital gains, and this means more money for you in retirement.
The bottom line is that it is possible to lead the life you want to in retirement. But it won’t happen by assuming the future will take care of itself. Taking steps today to plan for tomorrow is the starting point to ensure you have enough money for a long and fulfilling retirement.