It’s going to be easy for an Australian to accumulate $1 million by the retirement age of 67, especially if you’re young.
But the bad news is that if you’re 20, that $1 million will by the time you retire be worth a fraction of what it is worth today.
What you want is to have the equivalent of today’s $1 million, that is an amount which gives the same spending power in the future as it does today.
The Association of Superannuation Funds of Australia estimates a ‘comfortable‘ living standard requires an income of about $1,000 a week. To generate this income, you need about $670,000 as a lump sum.
A lump sum of $1 million on retirement would deliver about $1,500 a week, well ahead of the recommended $1,000.
Don’t forget that this income, at least under current rules, will be tax free. But then again it needs to last around 20 years to last the life expectancy of a male starting retirement at age 65.
This chart shows how much you need to earn per year starting superannuation payments at different ages in your life to be able to accumulate $1 million in superannuation from just compulsory superannuation contribution, calculated at 9.25%. (This has been calculated using an annual 7% return rate, which you could reasonably expect from a good super provider.)
Obviously the younger you start, the easier it is to accumulate the cool million. At age 25, you need only put away $378.77 per month. At age 50, you need $3,136.65.
The rate of return you get, the fees charged and whether the federal government makes any changes to the concessionary taxes are all issues which will impact how fast superannuation grows.
Additionally, as mentioned above, don’t forget that if you retire in 40 years time, $1 million will be worth a fraction of what it is today.
Jason Bragger, a Financial Planning Association planner from Dolfinwise in Brisbane, says a 20-year-old who earns $37,800 a year, indexed to inflation for their working life, and in a fund earning 8.4% net of fees, would have a balance of $1,000,000 at age of 67, the current official pension age.
“This is in actual dollars however,” says Bragger. To have a million dollars in real terms after inflation (2.5%) the same 20-year-old would need to start with a wage of $72,000 and keep earning that indexed to inflation each year until age 67.
This 20-year-old would end up with $3.19 million at the end of 47 years working life, which would roughly have the same spending power as $1 million today. With his wage rising 2.5% each year to account for inflation he would finish his working life on $229,000 a year.
The effects of inflation can be devastating. We’re currently in a low inflation period but it hasn’t always been so. You would need $8.625 million in 2013 to have the same spending power as $1 million 40 years earlier in 1973. During that period inflation ran at an average 5.5%.
Bragger says that for the majority of Australians this means doing more than relying on employer compulsory contributions of 9.25%. Other strategies such as salary sacrifice or investments outside the superannuation environment should be used.
Here’s another little calculation helper. This was taken from the JP Morgan Asset Management’s 2014 Guide to Retirement and suggests that if you’re 50 years old and make $100,000 a year, you should have saved $390,000 by now.
This is a rough guide and was built for American conditions and assumes people are putting away 5% of income. Of course, we in Australia currently save 9.25% in superannuation.
As a place to retire on the following criteria, Australia is No.5 in the world, well ahead of the US and the UK. So, by accident, most of us have picked the right place to retire.
The Natixis CoreData Global Retirement Index is an international comparison tool with an objective of providing a global benchmark for retirees and future retirees to evaluate and compare the suitability of nations globally in meeting retirement expectations, needs and ambitions.
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