Earn $100k p.a. or more in retirement

For most of us, retirement seems a lifetime away (and with moves to increase the retirement age to 70, it’s even further away for those born after 1965). But, one day, you will retire. Surprisingly, only 4.5 per cent of Australians will live on a household income of $100,000 p.a. or more in retirement.¹

As we go about our lives, it’s easy to get caught up in everyday expenses without thinking about future finances. Retirement is supposed to be about living the life you want, but that means having enough money to do the things you love. According to the 2012–2013 Australian Bureau of Statistics, only 4.5 per cent of people who retired from the labour force have a total gross weekly household income of $2,000 or more.¹

The 2014 Budget outlined Federal Government plans to lift the retirement age to 70 by the year 2035, and Treasurer Joe Hockey has started the conversation about lifting the superannuation preservation age to match.

The impact of this means you will have more time for your investments to grow and less time to spend the results. But consider, too, you may need to stop work earlier than you intend.

So while the rules around retirement may change, one certainty is that tomorrow’s retirees will need a plan that includes super, supplemented by passive income from other investment.

For the purpose of this article all examples will be based on a retirement age of 65 and rounded to the nearest $1,000.

Out of Sync

Improvements in aged care and diet, along with medical advances mean the majority of people today will live longer than generations that went before them. As a result, our retirement expectations are out of sync with our retirement savings, and most of us aren’t saving enough to pursue our retirement dreams.

Our idea of what is ‘comfortable’ is likely to be slightly more than the Association of Superannuation Fund Australia’s definition at $41,169 a year for singles or $56,317 for couples.² The consensus is that 60 to 65 per cent of your pre-retirement household income should be your retirement income target.³ Therefore, if you earn a household income of around $160,000 per annum pre-retirement, an annual retirement income goal of $2,000 per week or $104,000 p.a. would be a more appropriate target to maintain your standard of living.

How Much Do You Need?

If you want to earn $104,000 p.a. in retirement, you will need to be mortgage-free and have $2,600,000 (in today’s dollars) in investments (based on a 4 per cent return). With inflation at 3 per cent, in 15 years’ time this equates to an annual income of $162,000 from a $4,051,000 portfolio.

Meet Tony and Judy Jones

Tony and Judy represent an average professional Australian couple whose goal is to retire in 15 years at age 65. They currently have an annual income of $160,000 and also have $155,000 in superannuation savings. Tony and Judy want to travel around the world and visit relatives overseas. They also want to be able to pay for their daughter’s wedding and access the right medical care and retirement accommodation when needed.

In 15 years Tony and Judy’s superannuation savings will grow to $533,000 from their regular contributions and returns from funds invested. Despite this growth they still have a retirement shortfall of $3,518,000, if they want to achieve those financial and lifestyle goals. That means they’ll need to save $235,000 every year for the next 15 years... it’s a frightening figure. But there is a smarter way for Tony and Judy to close the gap.

Plan Earlier and Smarter

Most Australians like Tony and Judy struggle to reach what they need to achieve a comfortable retirement because they don’t have a plan in place. Typically, like Tony and Judy, their savings are accumulation-based. With this approach it’s unlikely they’ll reach their goals by retirement age. The alternative way is to earn money from assets. There are many investment products available with the most common being direct shares, high interest savings accounts, extra super contributions, term deposits, self-managed super funds and managed investments.⁴

Investing in Property

Property growth is another investment that can help you build wealth. With such a sustained growth, you’d think more Australians would invest in property, but according to the Australian Taxation Office,⁵ only 1.7 million Australians are recorded as having an interest in a rental property. Of those, the majority (72 per cent) have an interest in only one rental property.

If we go back to Tony and Judy’s case, for example, we have established they need to save $235,000 a year for each of the next 15 years. Structuring the purchase of four rental properties into their investment plan would be one way for them to reach this goal (refer table 3).

The Plan for Tony and Judy

Where to from here?

If you decide to invest in property, take some time to consider your overall retirement goals and timeframes and be sure to work with a reputable company that can assist you in building an investment portfolio.

The right consultant will consider your current situation and goals, calculate your borrowing capacity, then provide a plan with a clear strategy to achieve your desired outcome, making sure your decisions are informed, and not based on emotion.