Why Saving for Your Future Now Is Important
There are two reasons you need to start saving for your future today. Not in five years when your income increases, and not when reality hits a decade from now and you realise retirement is something that is actually going to happen. You should start T-O-D-A-Y.
1. You need a lot of money to live comfortably when you are retired.
You should have at least half a million as a lump sum in superannuation and closer to $900,000 as a couple. This amount, plus, the money you receive from the age pension, will be enough for the average Australian to live comfortably during retirement. Want to travel, have money to leave to the kids, or be able to cope with life’s hiccups – health and dental expenses, home repairs, car trouble – without going into debt? You’ll need to save even more.
What about inflation? Are you prepared for how much inflation will eat away at your hard-earned money? In 20 years, if you planned on having $60,000 a year to cover your expenses and lifestyle, at 2% inflation, you’ll need close to $90,000 to have $60,000 worth of buying power. Looks like waiting until you’re 40 to play catch up with your personal super contributions is not the best plan.
2. The earlier you start saving, the more your money will grow on its own.
Whilst inflation and taxes will shrink your money, the interest you earn, and the interest earned on that interest, will make your savings grow exponentially. It’s the fantastic phenomena of compound interest. Time is your savings’ best friend.
As an example, if you contributed $1,500 into your super fund today and it earned an average interest rate of 6%, your $1,500 would grow to $2,007 after 5 years. Without contributing another dollar, simply by doing nothing, that same $1,500 would become $15,429 after 40 years.
$15k isn’t going to cover your living expenses during retirement but the point here is that $ + Time + Interest = a lot of money you don’t have to come up with to help build your nest egg. In a sense, patience is your highest paying client.
Now, look what happens when you invest $1,500 every year for 40 years at the same average rate of 6%. You’ll have $247,572 at the end of those 40 years. To get this sum, you only had to contribute $60,000, the rest is earned interest.
The takeaway here is that even if you aren’t earning a high income right now, you can still create a comfortable future just by putting away something. With enough time, compound interest will make the small personal contributions you may make now, worth more than the larger contributions you may be able to make 5, 10, and 20 years down the road.
Whether you can save $50 a month or $500, the key is to start today. You’ll benefit from the compound interest – as well as from the wise saving habits you build along the way.
How Much Will You Need When You Retire?
What will you need? $600,000? A million? More? As you save for your future and create workable strategies to reach your goals, don’t forget to customise your plan to your needs. How much you will need when you retire is going to be different than how much someone else will need.
To determine what you should save, decide what salary you would be comfortable with whilst retired. Also, think about when you may plan to retire.
Figure out how much you will need to cover your desired annual income for the number of years you expect to be retired for. As a general rule, you should plan on having an income in place to last until you are at least 90.
MoneySmart has a free calculator that lets you see how much your savings will grow over time. Just don’t forget that this figure doesn’t include the effects of inflation. Also, for pre-taxed income, keep in mind your super contributions will be taxed. It can also be helpful to seek the advice of a financial advisor. A professional can help make sure you are on track to meet your goals.
Also, plan for the unexpected. What would you do if you became ill and had to stop working in your early 60s? What sort of savings, insurance and other financial resources do you have in place to cope with something that would derail your plan? What if the value of your home or your business drops before retirement and suddenly the equity you had hoped to sell to help fund your retirement has shrunk?
Have enough to live off of. And have enough for a rainy day. We all want to be secure and to live well when we are older. When you are an on-demand worker, you do have to work a little harder to build up your retirement. However, through understanding your tax benefits, how to save, and how to use time (and compound interest) to your advantage, you can create the future you want. Just start envisioning it – and saving for it – today!