Lesson 30: Looking to the Future
For the last few months you've been busy cutting your expenses, working on your Spending Plan and building your Emergency Fund and generally saving money.
That's what you do in your youth and middle age. Working hard to build assets by paying off your mortgage, paying down debt and raising your family and generally enjoying life.
But there comes a time later on when you might want (or need) to slow down a little, take it easy and not work so hard. You might want to go to part-time work or even fully retire.
The only way to make that happen is to have a good retirement plan in place. And that's what we will be looking at over the next few lessons, so that when you decide it is time to stop working and start taking it easy you will be financially independent and able to live debt free, cashed up and laughing.
Financial independence is when you reach the point where, if you want to, you can get by on the cash flow from your savings, superannuation and investments, and where you no longer have to work at paid employment to pay the bills.
Create Your Retirement Plan
When you're young and just starting your working life, retirement seems a long, long way off. Saving regularly for retirement just doesn't appear to be important, after all you have years to build your savings.
By the time we reach middle age we see the error of our ways and wish we had been saving at least a little, regularly, over the intervening years, because all of a sudden we see and understand the power of compounding interest and wish we had seen the value of saving early in life.
For example would you like to have a nice round $1 million in your bank account when you are sixty-five (I know I would)? Well if you don’t start saving until you are 50, you will need to save$2,889.85 each month to have your million dollars in fifteen years. And that's at a generous 8 percent rate of return! Interest rates aren't quite that generous at the moment, so you'd need to be frantically stashing away a lot more.
However if you began saving at 10, you would only need to save$84.10 a month to have your million dollars at age sixty-five.
That's a huge difference! The point is : start saving for retirement as early as you can (and encourage your children to save too, lead by example and teach them to save as early as you can).
If you are working in paid employment you are already getting some money put into compulsory superannuation for you, but it won't be enough. If you're not working, then you don’t have that advantage and you need to build your own retirement fund.
Retirement may seem a long way off, and saving for retirement may seem just to hard and complicated to worry about just yet. But one day you'll want to retire. There is one very powerful word to remember, the most powerful word in the financial world: SAVE.
It's the key to financial independence and a happy, debt free, cashed up retirement.
Building a Strong Retirement Fund
There are a few steps to building a strong and healthy, cashed up retirement fund.
1. Save. Save, save, save as much as you can on a regular basis. That million dollars won't grow from nothing, you need to feed it with regular saving.
2. Invest your money wisely. That means getting good advice and diversification - you don’t put all your eggs in the one basket so don't put all your savings in the one place.
3. Take maximum advantage of your compulsory superannuation plan (there are definite tax advantages to doing so). Speak to your accountant or financial adviser and work out how you can maximize your contributions to your best advantage. This can be a tricky area so good, sound advice is essential. Your paymaster should be able to give you the details of who to contact at your particular super fund for advice if you don't have an accountant or financial adviser.
How much your savings will grow will depend not only on the amount you save but on which investments you choose. Your super fund will have advisors who will be able to asses the type of investor you are and guide you in the right direction.
Taking a Risk: the Consequences of Different Investment Plans
How much does it matter which type of investment you choose for your retirement fund? A lot!
And this is where, for the average Australian, it all starts to go a bit pear shaped. The laws surrounding salary sacrificing into superannuation are confusing, even for professionals, and they have just changed again.
What you need to remember is that adding more to your super, up to the allowable limits, will reduce your tax liability. It also means that you can't touch that money until you retire, unlike just saving it in a regular savings or investment account.
That is an advantage of putting your money somewhere other than in your super fund. But, the tax liability is very different.
Understanding Superannuation Limits
While we are encouraged to save into our super, there are limits to just how much we can stash into our account each year (and this has just been reduced again).
Again, you need to talk to your accountant, the formulas are complicated and the penalties for saving too much into superannuation are huge. Get professional advice and keep more of your money.
The Next Step
Talk things over with your spouse or partner and your tax advisor, financial planner or accountant (or all three). Look at the way you are saving for retirement. Is it time to expand your portfolio, expand, contract or rearrange the way your funds are allocated? Is it time to save more? Or perhaps you need to save less into super and more into your Emergency or Peace of Mind accounts?
Just remember: tax laws are always changing, so you should review your retirement savings plan at least every two years, but preferably every year at tax time to make sure you have all your eggs in the right baskets and are maximizing your saving efforts.
The "I don't need super, I'll have my husband's/I don't plan to retire" Syndrome
I hear all the time from women who have spent most of their lives being wives, mothers and homemakers, who are confident that their husband/partner's superannuation will be more than enough to ensure they have a happy, financially secure retirement. Not true!
Whether you plan on relying on your husband' super or working until the day you die, you should still be contributing to your own retirement savings. Life changes, and the future is unknown. Building a retirement fund will give you the luxury of a fully funded retirement when you choose it, or the luxury of working until you decide you want to stop, or covering your living expenses in the event of an emergency.
Lesson 30 Challenge: This week think of four ways you can relax, spending little or no money, and enjoy the company of good friends. Jot it down in your notebook. Then ring - yes use the phone - those friends and make a date to get together and have some frugal fun. We live in a world of instant, virtual communication. It helps us keep in touch but is isolating at the same time. Make a date for a physical get together at least one weekend in the next month.
That's what you do in your youth and middle age. Working hard to build assets by paying off your mortgage, paying down debt and raising your family and generally enjoying life.
But there comes a time later on when you might want (or need) to slow down a little, take it easy and not work so hard. You might want to go to part-time work or even fully retire.
The only way to make that happen is to have a good retirement plan in place. And that's what we will be looking at over the next few lessons, so that when you decide it is time to stop working and start taking it easy you will be financially independent and able to live debt free, cashed up and laughing.
Financial independence is when you reach the point where, if you want to, you can get by on the cash flow from your savings, superannuation and investments, and where you no longer have to work at paid employment to pay the bills.
Create Your Retirement Plan
When you're young and just starting your working life, retirement seems a long, long way off. Saving regularly for retirement just doesn't appear to be important, after all you have years to build your savings.
By the time we reach middle age we see the error of our ways and wish we had been saving at least a little, regularly, over the intervening years, because all of a sudden we see and understand the power of compounding interest and wish we had seen the value of saving early in life.
For example would you like to have a nice round $1 million in your bank account when you are sixty-five (I know I would)? Well if you don’t start saving until you are 50, you will need to save$2,889.85 each month to have your million dollars in fifteen years. And that's at a generous 8 percent rate of return! Interest rates aren't quite that generous at the moment, so you'd need to be frantically stashing away a lot more.
However if you began saving at 10, you would only need to save$84.10 a month to have your million dollars at age sixty-five.
That's a huge difference! The point is : start saving for retirement as early as you can (and encourage your children to save too, lead by example and teach them to save as early as you can).
If you are working in paid employment you are already getting some money put into compulsory superannuation for you, but it won't be enough. If you're not working, then you don’t have that advantage and you need to build your own retirement fund.
Retirement may seem a long way off, and saving for retirement may seem just to hard and complicated to worry about just yet. But one day you'll want to retire. There is one very powerful word to remember, the most powerful word in the financial world: SAVE.
It's the key to financial independence and a happy, debt free, cashed up retirement.
Building a Strong Retirement Fund
There are a few steps to building a strong and healthy, cashed up retirement fund.
1. Save. Save, save, save as much as you can on a regular basis. That million dollars won't grow from nothing, you need to feed it with regular saving.
2. Invest your money wisely. That means getting good advice and diversification - you don’t put all your eggs in the one basket so don't put all your savings in the one place.
3. Take maximum advantage of your compulsory superannuation plan (there are definite tax advantages to doing so). Speak to your accountant or financial adviser and work out how you can maximize your contributions to your best advantage. This can be a tricky area so good, sound advice is essential. Your paymaster should be able to give you the details of who to contact at your particular super fund for advice if you don't have an accountant or financial adviser.
How much your savings will grow will depend not only on the amount you save but on which investments you choose. Your super fund will have advisors who will be able to asses the type of investor you are and guide you in the right direction.
Taking a Risk: the Consequences of Different Investment Plans
How much does it matter which type of investment you choose for your retirement fund? A lot!
And this is where, for the average Australian, it all starts to go a bit pear shaped. The laws surrounding salary sacrificing into superannuation are confusing, even for professionals, and they have just changed again.
What you need to remember is that adding more to your super, up to the allowable limits, will reduce your tax liability. It also means that you can't touch that money until you retire, unlike just saving it in a regular savings or investment account.
That is an advantage of putting your money somewhere other than in your super fund. But, the tax liability is very different.
Understanding Superannuation Limits
While we are encouraged to save into our super, there are limits to just how much we can stash into our account each year (and this has just been reduced again).
Again, you need to talk to your accountant, the formulas are complicated and the penalties for saving too much into superannuation are huge. Get professional advice and keep more of your money.
The Next Step
Talk things over with your spouse or partner and your tax advisor, financial planner or accountant (or all three). Look at the way you are saving for retirement. Is it time to expand your portfolio, expand, contract or rearrange the way your funds are allocated? Is it time to save more? Or perhaps you need to save less into super and more into your Emergency or Peace of Mind accounts?
Just remember: tax laws are always changing, so you should review your retirement savings plan at least every two years, but preferably every year at tax time to make sure you have all your eggs in the right baskets and are maximizing your saving efforts.
The "I don't need super, I'll have my husband's/I don't plan to retire" Syndrome
I hear all the time from women who have spent most of their lives being wives, mothers and homemakers, who are confident that their husband/partner's superannuation will be more than enough to ensure they have a happy, financially secure retirement. Not true!
Whether you plan on relying on your husband' super or working until the day you die, you should still be contributing to your own retirement savings. Life changes, and the future is unknown. Building a retirement fund will give you the luxury of a fully funded retirement when you choose it, or the luxury of working until you decide you want to stop, or covering your living expenses in the event of an emergency.
Lesson 30 Challenge: This week think of four ways you can relax, spending little or no money, and enjoy the company of good friends. Jot it down in your notebook. Then ring - yes use the phone - those friends and make a date to get together and have some frugal fun. We live in a world of instant, virtual communication. It helps us keep in touch but is isolating at the same time. Make a date for a physical get together at least one weekend in the next month.