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Financial Happenings Blog
Monday, February 01 2010

An article in Monday's edition of The Australian newspaper written by Geoffrey Newman highlighted the projected deficiency between the amount the average Australian will save for their retirement and the amount needed - Superannuation gap blows out by hundreds of billions.  The numbers are indeed sobering.

The article referred to a report conducted by Rice Warner which suggested that we needed to contribute 18-20 per cent of our incomes into retirement savings each year to allow for an adequate retirement income.

There is pressure on the governemnt to increase the 9% of income that compulsorily goes into superannuation each year.  Even if the government comes to the party some way it will still require some significant extra contributions by individuals to reach the necessary funds required for an adequate retirement.

So what are the alternatives?

We can rely on the government to look after us in our twilight years.  This, for most no matter what side of politics, seems to be taking a big risk.

Alternatively, we can start putting aside extra savings each year.  This does not mean that we need to pump these extra savings into superannuation.  There are other alternatives though maybe less tax effective provide a lot more of flexibility and some might say certainty compared to the superannuation system.

An easy way of looking at the benefits of this extra saving is using the magic 5% rule.  If you invest your assets prudently you should expect to be able to draw 5% of income from your savings each year while allowing the capital value of these assets to grow in line with inflation so that he $5 of income grows each year in line with the growth in the costs of goods and services.  This means that if you save an extra $100 this year that corresponds to an extra $5 of income per year for the rest of your life.

Now if you don't spend that income and rather reinvest it, after 10 years that $100 of savings will be able to generate $8.15 of income each year for the remainder of your life, after 20 years $13.25 and the numbers get more compelling the longer you are able to refrain from using the income.

It would be great if the government could step in to help build everyone's retirement savings for the future but most would agree we should not be relying on that to happen.  The more we can each afford to save each year will definietly help towards a much more comfortable existence later in life.

Scott Keefer

Posted by: Scott Keefer AT 10:51 pm   |  Permalink   |  Email
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