Many of our new clients come to us with around $700,000 in assets and about ten years left of their working lives. Their goal is to make sure they have enough money in order to live a good lifestyle during retirement. The first question we ask them is: how much money do you spend now? This is important, because we find that nobody wants to downgrade their lifestyle once they retire. So, to know what you need in retirement, first work out what you need right now.
If that’s around $80-90,000 a year right now, in ten years’ time it will be around $100,000 – keeping inflation in mind.
The point of today’s ‘how to turn $700,000 into $2 million’ question is to explain to our listeners and readers how to achieve this goal, step by step.
At the moment, $2 million is a very rough target for your super if you want to live well and not have to think about every cent you spend. You won’t be flying around in a private jet, but you will be comfortable.
Throughout our lives, there are different focuses when it comes to saving money – different ‘levers to pull’. To illustrate our step-by-step guide, we’ll call our example couple John and Jane Smith. They have $700,000 in assets and their youngest child is finishing university (meaning financial support is minimal).
The first thing we would do is look at where their money is – term deposits, shares, super – and how hard that money is working for them (i.e. how long will it take to reach that $2 million?). This analysis and breakdown would be communicated with our clients, because a large part of what we do is educate our clients on their own finances and explain why we’re doing what we’re doing. A lot of our clients aren’t always clear on how this works, and it’s important to us to explain it thoroughly.
Let’s say John and Jane have 30% in cash and fixed interest – the amount of $210,000. With the current interest rates, that amount sitting in the bank isn’t really doing anything, compared with other methods of investment. Having money invested in quality companies globally and in Australia is important – we do what is sometimes referred to as a ‘portfolio x-ray’. And with a rate of return between 6-8% (being conservative to be safe) – the sharemarket has a much higher return than term deposits do right now. While we do encourage clients to invest, it is also a good idea to have a small amount in an easy-to-access bank account for emergencies.
Then we would look at what they can do at tax time – May or June is a good time to look at clients’ financial position and make changes, focusing on what kind of tax return they could get. This is not the big picture, but if we can get our clients a good return and a chunk of money to put towards their portfolio or super, then that’s a bonus. We’ll look at things like concessional contributions and how to take advantage of these. Especially with the carry-forward allowance, you could be picking up huge tax returns. (Check out the podcast The Good, The Bad and the Ugly of Tax Deductions for more information about lump sum contributions and consequent tax savings. From July 1st 2021, the $25,000 cap is going up to $27,500 while employer contributions are going up from 9.5% to 10%. Listen to the podcast Changes to Super Contribution Caps for more information).
After that, in John and Jane’s example, we would work backwards to figure out how much money they need to save to get to $2 million. This will give us the figure that they need to put into their super each year.
A very general rule of thumb is that if you have $700,000 in super, it would roughly double over ten years, giving you $1.4 or $1.5 million. This leaves you short by $500,000 – and for every $100,000 that you are short, you need to save about $500 extra a week (or $26,000 a year) to make up the difference. Then, you need to make sure everything you do is getting the most out of your tax. This sounds like a lot of extra money, but we often find that when our clients sit down and look at their spending habits, there are always areas they can reduce. Then, we recommend making fortnightly payments into super, post-tax.
The next step is to review the plan regularly and ask: is this sustainable over ten years? If not, we’ll need to adjust it. In any case, our clients say they come to us for peace of mind and accountability. A big part of our job is to make sure clients stick to the plan and are able to stay on top of it.
It’s ideal for a couple to have roughly equal amounts of money in their super when they retire. There is a cap of $1.7 million for an individual to be able to withdraw funds in a 0% tax environment. This is essentially a tax-free company or trust, and is quite unique to Australia. This means you can draw $100,000 a year and pay no tax for the rest of your life. This is fantastic because with the concessional caps you can get a tax reduction on the way in and pay no tax on the way out. This is not the case in the UK and the US, where only one way is free. However, the trade-off is that we have some of the highest tax rates in the world.
Saving for retirement is important because from the day you retire, your money has to ‘get dressed and go to work for you’. It has to last until the end. And as our lives get longer, we are seeing longer and healthier retirements. This is great, but can be more challenging financially. You need that money to keep growing. Even if you have the whole $2 million, you still need a system of knowing how much you can spend. And of course, the final piece of the puzzle is what will happen to your money when you no longer need it. Nobody wants to think about that, but it is part of the planning, and working out how to make the most of the money for the person or people you are leaving it with.
If you need help with any of the steps mentioned above, please get in touch with us at email@example.com
We love helping our clients maximise their money and we know we have an advantage in retirement planning over advisers who have clients of all ages, because this is what we see every single day. Talk to us in person or via Zoom – we are confident in helping you make a successful retirement plan!
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