As many financial experts tell us, it’s never too early to start investing in your superannuation. But for many people under the age of 40, super only gets a second thought when it pops up as a deduction on their payslip. When retirement feels so far off, it’s easy to feel like investing in a retirement income can be put off too. Especially when you have no idea how much you might need, you don’t know what a good super fund actually looks like, and you’re unsure if you should add to your super or save for a house deposit.
We spoke to financial adviser Tim Henry, member of the Association of Financial Advisers and founder of Aspire Planning, about how younger people can set a plan in motion for retirement with minimal effort.
Thanks for talking to us. Before we get into it, retirement has changed a lot over the years. In your experience with your clients, what does it look like today?
Traditionally, retirement has always been at 60 or 65 years old. But now, because we’re living so much longer and are much fitter, people are not mentally ready to stop working altogether when they’re 65.
They might be financially ready – and they might be ready to stop full-time work – but more and more we’re starting to realise that work actually does play a good role in our lives. It gives us purpose. So at the traditional retirement age, people find that work ends up becoming, probably for the first time in their lives, something they do not for financial reasons but for what it gives them. If you can be working because you want to and not because you need to, then that’s what we’d all love, isn’t it? It’s a transition into full-time living.
Retirement seems like a long way off when you’re young. In your opinion, should young people – say, those aged between 18 and 34 – really be thinking about it now?
Absolutely, you should be. But it’s not going to be, by any stretch of the imagination, your number one priority. In fact, I would say that in most discussions I have, it’s low priority because there are more immediately pressing things. But it’s a good time to determine the quality of the life you want to lead – as retirement could end up being a third of your lifetime. Think of it in lifestyle terms: would you want that part of your life to be enjoyable and stress-free? If so, then you’re probably going to need to make some plans. The average life expectancy for men is about 85 and 87 for women, and it’s increasing all the time. I think the generation we’re talking about is probably looking at 100 knocking on the door.
How can a young person work out how much money they might need to retire comfortably? Is there a rule of thumb they could apply?
Most super funds would easily offer 5 per cent investment return, so what I normally say to retirees is that if they can live off that 5 per cent, and not really dip into their money any further, then that is all they would need. As a start, I would say that if you’ve got 20 times whatever income you want to have in retirement, you’re going to have plenty.
Should young people be making additional contributions to their super or investing in a house deposit?
Our business is driven by people living the life they want to live. We always prioritise your lifestyle goals right now over your goals later on, within reason. Something that’s emotionally important to you now is absolutely important for you to do, because that’s going to help you live a happy and healthy life today. Give priority to the immediate while also just chipping away at the longer term.
Your money is also pretty much locked in your super fund until you’re 60 years old, minimum, or retired. It would not be beneficial to be ploughing all your money into your super now, because you can’t get it out if your situation changes.
But don’t forget that if you’re 25 or 30 years old, and you live till you’re 90, you could potentially have money in super for 60 years. Now, that compounding effect has a huge impact. Even though the ’20 times’ number I mentioned before might seem big, the compounding factor assists with that, so your super money is going to grow to quite a large sum naturally.
Can you explain a bit more about how compounding investment returns impact super in the longer term?
Compound interest is when you have a base amount, and the interest you earn on that base amount is then added to that base amount, which in turn increases the amount of interest you earn. If we apply that to the world of super, your fund has standard compounding investment returns, plus your contributions are coming in every year as well. So the base amount of your super balance is ever-growing and ever-accelerating.
You mentioned having an income in mind for what someone would want to live on when they’re retired. Is there a way for people to visualise their retirement and what they might want to consider when thinking about that income?
First, you’ve got your general living needs, which would be lower than if you’ve got a family right now, because you won’t have kids to support. So just your day-to-day living needs – what does it cost to eat, pay bills, and that sort of thing.
Most retired people like to travel overseas every year or two up to about the age of 80. We factor in these types of things when we build plans for people. We don’t really know what our health will look like down the track, but if you’ve got known health factors then you’ve got to take those into account, too.
Does being single affect the amount of money you should be thinking about?
There’s no doubt that it’s financially beneficial to be a couple because you’re sharing the costs of things. In some ways, single people do probably need to make sure they have a strong plan for retirement if they won’t have someone to fall back on or to share costs. Any single person is going to tell you that it’s harder for them to pay the bills on their own than it is for two people.
The current economic environment seems a bit uncertain. How does this uncertainty affect people’s retirement plans?
One of the big things a lot of people, particularly younger people, don’t realise is that they can choose how their super fund money is invested, and they can choose the level of risk they take.
A really aggressive fund will respond more drastically to the share market going up and down. But that is your choice. You can choose the level of risk you want to take in your fund. Do what you’re comfortable with. And whether it’s good times, bad times, or indifferent times, stay the course. If you’ve got the right mix that’s right for you, you can look past the uncertainty because you know that, in the long term, you’ll be able to play through all of those problems.
When you’re younger, if you want to take that greater risk, there’s also potentially more time for the market to correct itself. Is that right?
Exactly right. I think people might look at the GFC (Global Financial Crisis) and say, “I wouldn’t want that to happen again.” But it’s going to happen again. There’s likely going to be 10 market crashes and corrections between now and a young person’s retirement. If you actually set things to expect it, and you’re prepared to ride it out, then it doesn’t really need to play a factor in your thinking. I would encourage younger people to not be worried about that.
What is the most misunderstood thing about retirement?
Probably that your super money stops earning anything once you retire, and whatever money you’ve got left, that’s it. That’s not true: your super fund money continues to be invested throughout your retirement.
What would you suggest looking for in a super fund if someone were thinking about consolidating their super all into one or switching over to a different fund?
There are a lot of ratings and comparison resources now, like ChantWest and Super Switch. They’re pretty reliable. Getting performance data is really hard – the super funds don’t make it easy. The government’s MoneySmart website has a lot of links to help people find the resources to compare funds. The main thing is cost and performance. Is your super fund money working as hard as it should? Are there costs that come out that are draining your balance despite the compound interest and contributions? And are those costs as low as they should be?