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Time is one of the most helpful ingredients in building your wealth. Combined with the magic of compound interest, you could set yourself financially on the way to early retirement.
Around 3.6 million Australians are retired.1 This includes 1.7 million men and 1.9 million women. But many Australians are expecting to retire later rather than earlier, with latest figures2 showing 58% of people expect to retire at 66 years of age or older, compared with 42% in 2014.
If this trend does not appeal to you and early retirement is more appealing, harnessing the lucrative resources of time and compound interest could be your best assets.
Albert Einstein is said to have famously described compound interest as the eighth wonder of the world.
Compounding is the process of earning interest on interest.
The Australian Securities and Investment’s Commission’s (ASIC) MoneySmart website describes it as “double chocolate topping for your savings”.
Superannuation is perfectly placed to benefit from compound interest because the compounding effect happens automatically over decades.
ASIC’s MoneySmart compound interest calculator can help you see where compound interest might take you and the impact of starting early for long-term investing.
The calculator shows that through investing early and utilising compound interest, a 20-year-old who starts putting aside $190 a month at an 8% investment return may be a millionaire by the time they’re 65. With $102,600 in regular deposits over 45 years, they may earn $899,563 in total interest for total savings of $1,002,163.4
The Association of Superannuation Funds of Australia (ASFA) regularly crunches the numbers to help you see how much you are likely to need for the retirement you want.
ASFA costs retirement in Australia against both a “comfortable” and a “modest” measurement. A comfortable retirement means a lifestyle that affords a good car, top-tier private health insurance, regular dining out and some international travel, and many of the trappings enjoyed during working life.
ASFA has calculated that a single person currently wishing to have a “comfortable” retirement would need, at age 65, a nest egg of about $545,000, or $640,000 for a couple.5
Try QSuper’s Retirement Income Calculator to see how much you may need to fund your retirement goals.
Automation is one of the easiest ways to save. A way to effectively automate your saving is salary sacrificing.
Salary sacrifice is an arrangement between you and your employer to contribute a portion of your salary to your superannuation account before you pay tax on it, instead of it being part of your take-home pay. This is an extra voluntary amount on top of your employer’s compulsory super contribution.
Investments held in super may receive significant tax advantages, both before and throughout retirement. Depending on your current income, sacrificing some of your salary to superannuation could be a tax-effective strategy.
Find out more about the benefits of salary sacrificing.
Take control of your finances with the support of financial advice.
1. Australian Bureau of Statistics, Retirement and Retirement Intentions, Australia, July 2016 to June 2017, accessed 3 January 2020 at https://www.abs.gov.au/ausstats/abs@.nsf/mf/6238.0
2. Australian Human Rights Commission and Australian HR Institute, 2018, Employing older workers, at www.humanrights.gov.au/our-work/age-discrimination/publications/employing-older-workers-2018
3. Australian Securities and Investment Commission, MoneySmart, Guide to compound interest, accessed 4 December 2019 at https://www.moneysmart.gov.au/managing-your-money/saving/compound-interest
4. ASIC, MoneySmart, Compound Interest Calculator, accessed 5 December 2019. This is a model, not a predication. For full assumptions and calculations visit https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/compound-interest-calculator
5. Association of Superannuation Funds of Australia, ASFA Retirement Standard June quarter 2019, accessed 5 December 2019 at https://www.superannuation.asn.au/resources/retirement-standard
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