Doing some simple (but crucial) super sums
When you think of your retirement you probably think of a time you'll enjoy. Perhaps a world cruise, a new car, a holiday house, spoiling the grandkids and spoiling yourself. And you'll certainly want the financial security to do what you want, when you want to.
We'd like to help you make the right preparations for securing your financial future. And the earlier you start these preparations, the easier it will be to reach financial independence in retirement.
Then you can spoil yourself... without worrying about whether you've got enough money!
Asking three simple questions will help you to understand how to prepare for retirement.
How much money will you need?
Although it's difficult to predict exactly how much income you will need in retirement, there are a few indicators that can help.
Generally speaking, somewhere between 50 per cent and 75 per cent of your income prior to retirement will be needed after you stop work. Of course, this differs for every individual because although some fixed costs such as travelling to and from work may decrease, other costs such as medical or holidays may increase. Determining the amount you think you will need is a very personal decision.
Even though your expenses will probably fall in retirement, it's possible that you may need as much as 75 per cent of your pre-retirement income to make ends meet. So how much do you need to put away to reach this magical 75 per cent figure? The key variable here is age, which determines the number of years to retirement.
The amount of your pre-retirement income you choose to retire on, (whether this be 40, 50, 60, or 75 per cent) affects the amount you need to save now. The better the retirement, the more you need to save in advance. Makes sense!
For example, if you are currently 45 years of age and would like to retire at age 65 with an income equivalent to 75 per cent of your salary, you would need to contribute 35 per cent of your salary in order to achieve this goal. Remembering to allow for the 9 per cent your employer will be contributing.
|Percentage of income wanted at retirement|
Source : Graph prepared by Zurich
- 15 per cent contributions tax (for salary sacrifice)
- investment earnings - 8 per cent before tax
- tax of 15 per cent on investment earnings
- no other superannuation or other financial assets existing
- fees on superannuation contributions assumed to be 4 per cent up-front plus a 1.60 per cent ongoing management charge
- retirement age is 65 and life expectancy is 15 years from this age
- salary assumed to increase by 3.5 per cent p.a.
How much do you have already?
It is not always as easy to work out as it seems! For an accurate estimation, consider the amount you already have in superannuation and other investments. Other assets may include current savings, future savings, inheritances, investment real estate or other assets such as antiques or art.
The amount that each of these assets contributes to your retirement funding will vary depending on your individual situation. For example, your personal savings percentage could be much larger if you are expecting an inheritance or if you expect to sell a home with appreciated value during your retirement.
How can you make up the difference?
Once you know how big the gap is between how much you will need for retirement and how much you think will have based on your current situation, the next step is to work out how to make up the difference.
The key to ensuring you have enough money for a comfortable retirement lies in:
Time - the earlier you start, the more chance your money has to grow. Compound interest has a powerful effect on long-term savings.
Returns - understanding how to get a good return on your money helps it to grow faster over time.
Superannuation - tax advantages mean that superannuation is still one of the best ways to save for retirement.
For more information, please contact your financial adviser.
Zurich can assist you with contacting a financial adviser.