How much should we be saving and investing and what’s a good rule of thumb?
I thought I would have a little fun and quickly show you what a 30 year old might consider saving as a proportion of their income, ensuring they can continue to live the lifestyle they are accustom to throughout retirement.
Let’s assume the person is permanently employed and already saving 9.5% of their salary in the form of employer superannuation contributions. If they earn $50,000 per annum their employer super contributions are a going to be $4,750. If our test dummy spends all of their wage ($50,000 per annum) where does the $4,750 employer super contribution leave them at age 60? Hypothetically, using an assumed rate of return of 6.5% per annum and a starting superannuation balance of $50,000 at age 30, their superannuation balance should work out to be $720,000 at age 60.
Now there are two fields of thoughts here when they hit 60. They can either draw the money down to zero over their lifetime or preserve the capital and only draw the income from the portfolio, typically in the form of dividends, distributions, rent, and interest. Broadly speaking if they wanted to end up with zero invested dollars by the time they depart this world, $720k is do-able. However, if they want to live a lifestyle that doesn’t force them to consume their invested capital, or worse potentially outlive it, they need more money, but how much more?
Let assume during this person’s working life they decide to match their employer’s super contribution, saving and investing 10% of their salary. It can be within super or outside super, it’s not really the point here. Based on the same figures and rate of return they’d be likely to amass $1,200,000! which is a combination of their extra invested savings, employer super contributions and their super balance. Now let’s assume they need to draw the equivalent of their after-tax income in retirement (approx. $42,000 p.a.) How are they looking? Well, depending on how its invested they might expect a yield on the portfolio of 4%, giving them an income of $48,000 per annum! They’ve almost replaced their entire pre-tax income!
As a rule of thumb, 20% is a good savings rate. In most instances we’re already getting the first half through our employer contributions, leaving us a shortfall of 10%. If we want to live a comfortable life in retirement, we need to consider putting that 10% to hard work. Importantly, the age you start saving and investing will dictate the outcome more so than the amount saved, or even the rate of return you get on your investments. Start now and save smart.
(It is important to note that the calculated returns and wage within this illustration do not factor in the very real impacts of inflation. The purpose of the article is to be informative and provide you with a starting base for your investment journey).
If you would like to discuss your savings or retirement income strategies, give the team at Steve May a call and start a conversation today.
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Shanley Financial Planning Pty Ltd trading as Steve May Financial Services (ABN 19 612 825 180) is a Corporate Authorised Representative of (1265706) of Sensibly Pty Ltd (AFSL 533923)
Nick Shanley, Steve May and Luke Styles are Authorised Representatives of Sensibly Pty Ltd (AFSL 533923)