We all know it’s never too late to start planning for your retirement. But did you how much better off you may be by starting earlier? The problem is, most people at the beginning of their career are more focused on purchasing a house, travelling or saving for major events like a wedding or the education of their children.
The fact you have a long time horizon until your retirement is one of your biggest advantages. The younger you are when you begin saving, the more time you have to let the compounding effect of the market returns work in your favour. The following table illustrates the benefits of contributing $10,000 p.a. as concessional contributions ($8,500 after tax) to super.
|
Age you start saving for retirement |
Amount (after tax) contributed each year |
Number of contributing years |
Amount you may have at age 65 |
Multiple Effect from age 25 |
|
25 |
$ 8,500 |
15* |
$992,326.02 |
NA |
|
25 |
$ 8,500 |
40 |
$1,492,871.29 |
NA |
|
35 |
$ 8,500 |
30 |
$734,186.34 |
$ 2.03 |
|
45 |
$ 8,500 |
20 |
$330,015.12 |
$ 4.52 |
|
55 |
$ 8,500 |
10 |
$114,702.59 |
$ 13.02 |
*$8,500 contributed for 15 years and invested until age 65.
Assumptions: earnings rate 6.5% (after tax). Flat contribution rate.
The fact is, the money you contribute earlier in your life will go a long way towards determining how comfortable your retirement will be. A dollar contributed at age 25 (using the above assumptions) is worth around $2 for every dollar contributed at age 35 and approximately $4.50 at age 45. This is the benefit of compounding returns. If you start salary sacrificing $10,000 ($8,500 after tax) to super at age 25 for 15 years, you could end up better off than if you start at 35, and contribute the same amount for 30 years. In other words, you might invest half as much and end up approximately $250,000 better off. Better still, if you didn’t stop after 15 years and instead continued to contribute until age 65, that 10 year head start could net you approximately $750,000 more for your retirement years!
It’s been our experience with clients starting in their 50’s that significant sacrifices to current lifestyle or taking on additional risk is required to build sufficient assets to fund the retirement they desire. In reality, if they started earlier there would be less pressure later in life.
Tax Efficiency
A considerable benefit of Australia’s superannuation system is the tax concessions available. Concessional Contributions are taxed at a flat rate of 15%. Income earned within the accumulation phase is taxed at 15%. Capital gains are also taxed at 15% if the investment was held for less than one year. A 1/3 discount is applied if held for a period of one year or more. For most, this is a considerable concession to their marginal tax rate. It becomes even better in pension phase with all income and capital gains tax free within the fund.
For more information
Planning for your retirement can be confusing. There are many financial challenges in the short and long term, and there are many opportunities that require assessment. Working with a financial consultant can help you maximise the opportunities and make smart decisions with your money. To lean more, contact a Stirling Financial Consultant today on 02 9545 7737.
Important Information
In preparing this material, no account was taken of the objectives, financial situation and needs of any particular person. Before making a decision on the basis of this material, you need to consider with our without the assistance of a financial adviser, whether the material is appropriate in light of your individual circumstances. Whilst ever effort has been made to ensure the accuracy of this information, we cannot guarantee this or be held responsible for any loss by any party relying on this information.
