The full age pension for a single person is around $23,824 and $35,916 for a couple1.
If you are eligible for the pension, and it still exists when you retire, could you live off this income for the following 20-30 years?
The average super balance for a male aged between 40-44 years old is $99,959, and for a female $61,9222. The average long-term annual compound median return on a ‘balanced’ super fund account is 7.5% a year for the 26-year period to 30 June 20183.
With the average salary being $82,4822b that means the average person is putting aside just $7,835 per year (the 9.5% Super contribution) toward their retirement.
Depending on how long you have to go until you retire and the investment returns achieved in that time, Super alone may not be enough to fund you for another 20 years in retirement.
The table below demonstrates that with a starting balance of $100,000, a higher than average salary of $100,000 per year and compounding annual returns of 7% – in 15 years, you would have around $513,000 in Super to retire on. If you wanted to retire at 60 and $60,000 per year income, your super would last about 8.5 years getting you to just age 68!
Realistically if you wanted to live off $60,000 a year, and you lived till 80 years old, you would need to have accumulated over $1.2 million dollars of income producing assets and that’s excluding inflation, interest and fees.
Try it yourself. Take your current income and multiply it by the number of years you’ll be in retirement and that will give you a good guide as to the level of incoming producing assets you need to acquire between now and then.
Whilst everyone is different, we find most Australian’s have very similar big picture goals…
1 – Save some of the tax they pay;
2 – Pay off the home loan as soon as possible;
3 – Understand their Superannuation better;
4 – Start investing (usually in property).
Maybe you’ve got some more…
Let’s understand why these are some of the most important financial goals to have…
The average wage in Australia is $82,482 per year5. That equates to approx $18,3546 per year in tax.
If you were working for just another 15 years, that’s $275,310 in tax. By investing in property, your tax can be put to work without changing the amount you take home each week. Imagine saving just half of your tax over the next 15 years – that’s around $137,655 that could be going toward paying for an investment property. Understanding how tax works and how you can legally minimise your tax and divert it to asset building is a key part of the formula to financial freedom.
The average loan size in New South Wales is $445,500 and in Queensland: $341,7007. Unless you take steps to pay it off faster, you could end up still owing over $100,000 in 25 years time. If you plan on retiring before that, you might be in a bit of trouble! However if you could pay off your loan in 10-15 years, you could save $130,000-$270,000 in interest alone (based on NSW and QLD loan values above) and not have to worry about repayments anymore.
The average price of a home in major capital cities and major regional areas of Australia has continued to rise over the long term. By leveraging your tax and structuring your finance properly, combined with careful research on properties within your budget, you can reasonably expect to build wealth over the long term through the safety of property. The table below shows that a property purchased for $400,000 today could be worth between $800 to over $1 million in around 15 years time. It’s this passive equity that you can use to help fund your lifestyle in retirement or sooner.
1Sept 2018 inc Energy Supplement. https://www.superguide.com.au/accessing-superannuation/age-pension-rates.
2Association of Superannuation Funds of Australia, Superannuation account balances by age and gender 2015-16, October 2017, pg. 9
2bAs of June 2018. https://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0.
4Mathematical calculation of compounding returns over time periods shown
5As of June 2018. https://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0.
6Income Tax for Individuals ATO 2018/19 Tax rates.
7March 2018, according to the ABS, https://www.realestate.com.au/home-loans/much-average-mortgage-australia.
8Mathematical calculation based on constant 6% interest rate and minimum principal and interest repayments over 30 years.