17 Aug 2020
We all have a beginning and end to our careers, and it's important to prepare for that end point: retirement. When will you retire, and will you be prepared for that drop in income? No matter your age, it's always smart to think ahead when it comes to saving for retirement.
When we're young, saving for retirement isn't something we think we need to consider, but the earlier you start the easier it'll be. Retirement savings are important because it's how you'll survive when you're no longer working for an income.
Superannuation is the most common form of saving for retirement, and it's done for you by your employer if you have a standard employment contract. It's not the only way to save for retirement though. You can start a retirement savings fund at any point in your life, but remember that most retirement savings funds will have relatively high-interest rates, so even if you only put in around $1,000, the earlier you put that in the more interest it will accrue and the more money you'll have when you retire.
Even if you never put more money into an account, letting it sit in an account and gain interest is better than letting it sit in your wallet or in a lockbox.
Money Smart shows that a retired couple will face costs of $62,269 for living comfortably or $40,560 for living modestly, while single people will face costs of $44,146 living comfortably or $28,165 living modestly. That data comes from the ASFA Retirement Standard in late 2019, so it's a reasonable estimate for anyone retiring soon, but inflation could cause those numbers to change in the future.
Of course, a lot of people will qualify for the age pension in Australia. The age pension rates have a maximum income for a couple of $1,297 per fortnight (roughly $33,732 a year) or for a single person $860 per fortnight (roughly $22,375 a year). This could change in the future as well, but it is worth taking into considerations (when you decide how much to save) that Australia does have some social services to help you out.
There are a few ways you can prepare for those days of relaxation once you retire from work.
We mentioned before that your super will come in handy when you retire. The amount of your super will vary based on your income throughout your career since your employer contributes an average of 9.5% of your income into your super. That's not the only way you can increase your super before you retire, though.
Salary sacrifice contributions towards your super mean less take-home pay, but it means more money going into your super account, and depending on what super fund you're with, your money will probably earn more in interest in a super account than in your regular account.
If you don't choose to salary sacrifice into your super fund, make sure your savings are still gaining interest. Make yourself a budget, decide how much savings you want to save a week/fortnight/month, and then organise automatic transferring payments into your savings account. Your savings account will have a higher interest rate than your regular account, so transferring the funds into a savings account will make you more money.
It's also important to shop around for the right savings account. It could be that the bank or credit union you're with at the moment doesn't have the best interest rates, so it could be worth switching. Even if there are costs to close a bank account and open a new one, the money made in interest could very well be worth it. And every dollar you make in interest means a more comfortable retirement.
The interest you accrue is based on three things: the interest rate (the higher the better), the money you put into the account (the more the better), and the frequency interest is compounded (the more frequent, the better).
Interest rates are a stable way to grow your savings, but if you have the mind for it (or a good advisor to help you out) then making investments might be a better way to prepare for retirement.
Sometimes the smart investment decision is to not invest in the market at all, but other times it can be a good idea to invest your money into something with stable growth so you can make money faster than if your money just sat in savings. Investing in something like real estate is often a good idea, but it depends on the real estate market in your area. You can speak to a broker to make high-risk (and high-reward, when successful) investments or low-risk (with smaller but more reliable gain) investments.
How much you choose to save for your retirement depends on the costs you expect when you're retired. If you plan ahead and ensure you have a low-cost place to live, start money-smart habits now, and keep in mind these retirement saving tips, you'll be a lot better off when you conclude your career than if you don't think ahead.