In our module, Where Your Wealth Comes From, we discuss the concept of financial success and the fact that it will hold a different meaning for each and every one of us. For example:
For some, financial success might mean having $1 million in investment assets and retired at age 65. Whereas, for others, it’s owning their own home and having enough behind them to live year on year.
Despite these differences, financial success is often linked to something that we all have in common, namely, financial goals – our vision for the future, which frequently centres on retirement (and our desired retirement lifestyle) and the accumulated wealth that will support this.
Furthermore, we anticipate that the financial decisions that we make throughout our life will eventually lead us to the achievement of our financial goals, and in doing so make our interpretation of financial success a living and breathing reality.
With this in mind, taking a proactive approach to retirement planning earlier means you can benefit from the power of compounding and give yourself flexibility if things change along the way. This may enable you to move towards your financial goals at a more comfortable pace. As such, we take a simplistic, but insightful look at four different scenarios and the impact of compounding.
Briefly, compounding is what happens when one event occurs on top of the other, for example compound interest (‘interest on interest’). Compounding turns small isolated events into significant long-term trends. The combined experience is far more significant than one of the events by themselves.
Before looking at the scenarios below, it’s important to consider your own personal circumstances (i.e. financial situation, goals and objectives). For example, in our article, ‘Understanding the path of the financial lifecycle’, we discuss the fact that you will go through different phases in your life.
Consequently, factors such as, but not limited to, your current priorities, timeframe until retirement, surplus income, liquidity needs, and tax bracket have to be considered when it comes to the ‘Five Ws and How’ principle (i.e. who, what, where, when, why, and how) of putting your money to use for wealth accumulation purposes.
Each scenario depicts you at a different age (in the present) when you start your retirement planning journey; however, your financial goals remain constant, namely, to accumulate $545,000 in superannuation by age 65, which is the minimum amount a single person may require for a comfortable retirement#.
General calculation assumptions
- You are employed, and your income for each starting age is based on recent ABS data^.
- Your employer is contributing the mandatory Superannuation Guarantee contributions.
- Your employer and voluntary contributions increase with inflation (3.2% per annum).
- 2% per annum for rising cost of living (CPI inflation) + additional 1.2% per annum for rising cost of community living standards.
- Contributions do not exceed the annual concessional and non-concessional contributions caps.
- Your superannuation balance for each starting age is based on recent ASFA data*.
- Your investment return (before tax, after fees/insurance premiums) from your underlying assets inside superannuation is 5.3% per annum, and your net tax on investment earnings is 4.1% per annum (15% less an allowance for tax concessions).
- $545,000 is measured in today’s dollars, which means it has been adjusted for inflation.
Scenario 1 – Aged 25
You are 25 years old and want to accumulate $545,000 in superannuation by age 65. As such, over and above your employer’s contributions, you will need to start contributing, for example, on an ongoing basis:
- Roughly $237 per month in concessional contributions; alternatively,
- Roughly $202 per month in non-concessional contributions.
Please note: From a compounding perspective, by adjusting your contributions frequency from monthly to weekly, your contributions would be roughly $55 (concessional) per week, or roughly $47 (non-concessional) per week, respectively.
Scenario 2 – Aged 35
You are 35 years old. As such, over and above your employer’s contributions, you will need to start contributing, for example, on an ongoing basis:
- Roughly $381 per month in concessional contributions; alternatively,
- Roughly $324 per month in non-concessional contributions.
Please note: Your contributions would be roughly $88 (concessional) per week, or roughly $75 (non-concessional) per week, respectively.
Scenario 3 – Aged 45
You are 45 years old. As such, over and above your employer’s contributions, you will need to start contributing, for example, on an ongoing basis:
- Roughly $800 per month in concessional contributions; alternatively,
- Roughly $680 per month in non-concessional contributions.
Please note: Your contributions would be roughly $185 (concessional) per week, or roughly $157 (non-concessional) per week, respectively.
Scenario 4 – Aged 55
You are 55 years old. As such, over and above your employer’s contributions, you will need to start contributing, for example, on an ongoing basis:
- Roughly $1,521 per month in concessional contributions and $597 per month in non-concessional contributions; alternatively,
- Roughly $1,777 per month in non-concessional contributions.
Please note: Your contributions would be roughly $351 (concessional) and $138 (non-concessional) per week, or roughly $410 (non-concessional) per week, respectively.
Admittedly, the above scenarios are simplistic in nature (e.g. they don’t take into account other strategies, such as the downsizing measure, the carry forward provision or the bring-forward rule, to name a few) and may not be relevant to your personal circumstances (e.g. financial situation, goals and objectives).
Nonetheless, they highlight something important. If you leave retirement planning for later, you may find that you are still able to achieve your financial goals comfortably. Alternatively, you may find yourself in a situation where you are under more pressure (i.e. contribution and/or risk-based) to reach your financial goals, or your expectations (i.e. accumulated wealth and/or retirement date) may need to be revised.
In a nutshell, when it comes to retirement planning, we can help point you in the right direction with an appropriately designed roadmap aligned with your financial situation, goals and objectives, and provide you with a helping hand along the way. However, at the end of the day, the fate of making your interpretation of financial success a reality ultimately rests with you.
If you have any questions regarding this article, please do not hesitate to contact us.
Get in touch
If you’d like to find out more about any of the above opportunities, then please get in touch.
We’d be more than happy to run through your financial situation with you to ensure you’re making the most of your superannuation accounts.
If this article interested you and you would like to speak to Pat Casey on the phone, select a time to speak Pat – Financial Planner Sydney.
At Assure Wealth we specialise in helping busy, successful families structure their finances to achieve greater wealth and financial peace of mind.
Disclaimer: The information provided on this website has been provided as general advice only. We have not considered your financial circumstances, needs or objectives and you should seek the assistance of your Walker Lane Pty Ltd Adviser before you make any decision regarding any products mentioned in this communication. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Walker Lane nor its related entities, employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information.
Assure Wealth Pty Ltd ABN 31 965 466 780 Corporate Authorised Representative no. 1244817, Patrick Casey Sub-Authorised Representative no. 1244748 of Walker Lane Pty Ltd ABN 70 626 199 826, an AFSL holder No 509305.