COMPOUNDING SUPER: RETIREMENT PLANNING AT ANY AGE ...

For some, financial success might mean having $1 million in investment assets and retired at age 65. Whereas, for others, it’s owning their own home and having enough behind them to live year on year.

Despite these differences, financial success is often linked to something that we all have in common, namely, financial goals – our vision for the future, which frequently centres on retirement (and our desired retirement lifestyle) and the accumulated wealth that will support this.

Furthermore, we anticipate that the financial decisions that we make throughout our life will eventually lead us to the achievement of our financial goals, and in doing so make our interpretation of financial success a living and breathing reality.

With this in mind, taking a proactive approach to retirement planning earlier means you can benefit from the power of compounding and give yourself flexibility if things change along the way. This may enable you to move towards your financial goals at a more comfortable pace. As such, we take a simplistic, but insightful look at four different scenarios and the impact of compounding.

Briefly, compounding is what happens when one event occurs on top of the other, for example compound interest (‘interest on interest’). Compounding turns small isolated events into significant long-term trends. The combined experience is far more significant than one of the events by themselves.  

Before looking at the scenarios below, it’s important to consider your own personal circumstances (i.e. financial situation, goals and objectives). For example, in our article, ‘Understanding the path of the financial lifecycle’, we discuss the fact that you will go through different phases in your life.

Consequently, factors such as, but not limited to, your current priorities, timeframe until retirement, surplus income, liquidity needs, and tax bracket have to be considered when it comes to the ‘Fives Ws and How’ principle (i.e. who, what, where, when, why, and how) of putting your money to use for wealth accumulation purposes.

 

Compounding super

Each scenario depicts you at a different age (in the present) when you start your retirement planning journey; however, your financial goals remain constant, namely, to accumulate $545,000 in superannuation by age 65, which is the minimum amount a single person may require for a comfortable retirement#.

General calculation assumptions

  • You are employed, and your income for each starting age is based on recent ABS data^.

  • Your employer is contributing the mandatory Superannuation Guarantee contributions.

  • Your employer and voluntary contributions increase with inflation (3.2% per annum).

    • 2% per annum for rising cost of living (CPI inflation) + additional 1.2% per annum for rising cost of community living standards.

  • Contributions do not exceed the annual concessional and non-concessional contributions caps.

  • Your superannuation balance for each starting age is based on recent ASFA data*.

  • Your investment return (before tax, after fees/insurance premiums) from your underlying assets inside superannuation is 5.3% per annum, and your net tax on investment earnings is 4.1% per annum (15% less an allowance for tax concessions).

  • $545,000 is measured in today’s dollars, which means it has been adjusted for inflation.

Scenario 1 – Aged 25

You are 25 years old and want to accumulate $545,000 in superannuation by age 65. As such, over and above your employer’s contributions, you will need to start contributing, for example, on an ongoing basis:

  • Roughly $237 per month in concessional contributions; alternatively,

  • Roughly $202 per month in non-concessional contributions.

Please note: From a compounding perspective, by adjusting your contributions frequency from monthly to weekly, your contributions would be roughly $55 (concessional) per week, or roughly $47 (non-concessional) per week, respectively.

Scenario 2 – Aged 35

You are 35 years old. As such, over and above your employer’s contributions, you will need to start contributing, for example, on an ongoing basis:

  • Roughly $381 per month in concessional contributions; alternatively,

  • Roughly $324 per month in non-concessional contributions.

Please note: Your contributions would be roughly $88 (concessional) per week, or roughly $75 (non-concessional) per week, respectively.

Scenario 3 – Aged 45

You are 45 years old. As such, over and above your employer’s contributions, you will need to start contributing, for example, on an ongoing basis:

  • Roughly $800 per month in concessional contributions; alternatively,

  • Roughly $680 per month in non-concessional contributions.

Please note: Your contributions would be roughly $185 (concessional) per week, or roughly $157 (non-concessional) per week, respectively.

Scenario 4 – Aged 55

You are 55 years old. As such, over and above your employer’s contributions, you will need to start contributing, for example, on an ongoing basis:

  • Roughly $1,521 per month in concessional contributions and $597 per month in non-concessional contributions; alternatively,

  • Roughly $1,777 per month in non-concessional contributions.

Please note: Your contributions would be roughly $351 (concessional) and $138 (non-concessional) per week, or roughly $410 (non-concessional) per week, respectively.

 

Moving forward

Admittedly, the above scenarios are simplistic in nature (e.g. they don’t take into account other strategies, such as the downsizing measure, the carry forward provision or the bring-forward rule, to name a few) and may not be relevant to your personal circumstances (e.g. financial situation, goals and objectives).

Nonetheless, they highlight something important. If you leave retirement planning for later, you may find that you are still able to achieve your financial goals comfortably. Alternatively, you may find yourself in a situation where you are under more pressure (i.e. contribution and/or risk-based) to reach your financial goals, or your expectations (i.e. accumulated wealth and/or retirement date) may need to be revised.

In a nutshell, when it comes to retirement planning, we can help point you in the right direction with an appropriately designed roadmap aligned with your financial situation, goals and objectives, and provide you with a helping hand along the way. However, at the end of the day, the fate of making your interpretation of financial success a reality ultimately rests with you.

If you have any questions regarding this article, please do not hesitate to contact us.

 

#Association of Superannuation Funds of Australia. (June 2018). Retirement Standard.

^Australian Bureau of Statistics. (2016). Characteristics of Employment, Australia, August 2015. Mean weekly earnings in main job, by age group and sex.

*Association of Superannuation Funds of Australia. (2017). Superannuation account balances by age and gender.

Belinda Frazer