Start investing now! Don’t delay! Let me show you why!

It is a struggle to save and invest. There is this constant struggle between maximising the present moment, as this is all we have, and delaying gratification that is a known quality of success and a better tomorrow.

Many schools of philosophy teach us that to be present and aware, a pre-requisite to happiness, we need to let go of our thoughts of the past and the future. This will help to relieve our fears, anxieties, biases and prejudices, clearing our minds to be able to be present in the moment. Enabling us to experience more in every passing interaction and moment.

Maximising the moment and delaying gratification by investing for a better tomorrow, is one of life’s dichotomies. There is no one size fits all solution. I wish I had the answer. The closest to an answer I have is being aware of this dichotomy and understanding the benefits of delayed gratification and the power of compounding. You can then make an informed decision on whether to forgo some of today, for a better tomorrow.

As we age and life passes by, our human capital, or lifetime earning power, will decrease or dissipate. Our youthful energy and motivations, or our physical and mental abilities, will likely change. The extra hours in the office or weekends spent working a second job, may no longer align with your values. Spending time sharing experiences with family and friends in the limited time we have on this earth may seem more important. It is therefore an imperative that we capture and convert some of this human capital to financial capital, investments that pay you while you live your life doing the things that bring you happiness.

The graph below is an illustration of the typical transfer over time of human capital to financial capital.

Source: Morningstar’s January 2016 Five keys to retirement investing special report

A starting point to understand the minimum amount of money you should save and invest each pay cheque is to consider your desired retirement age. The average age that people intend to retire is 65.5 years, while the average age that people retire, is 56.3 years (Australian Bureau of Statistics 2023). Knowing that we tend to overestimate the length of our working careers, working towards having enough financial capital by age 55 is a sensible approach. That way, if we do not have enough by age 55, there is a good buffer of an extra decade to be able to work and invest additional money.

The Association of Superannuation Funds of Australia (ASFA) estimates that a couple in Australia needs $46,620 pa to live a modest lifestyle in retirement. Refer to the table below.

Source: ASFA Retirement Standard, September quarter 2023

Understanding the amount you need for a comfortable retirement and the amount of time you have until your desired retirement age, will assist in creating a baseline savings rate. Knowing your baseline savings rate will help you find the balance between enjoying the moment, while securing your future.

William Bengen in 1994 published a paper determining that a retiree invested in 50% shares and 50% bonds, could safely withdraw 4% inflation adjusted of their portfolio each year. In a future post we will discuss this further, however a safe withdrawal rate of 4% is the industry standard.

Considering a modest retirement for a couple is $46,620 pa, the capital required to meet a safe withdrawal rate of 4%, is $1,165,500. This is assuming you will not receive any social security benefits in retirement. In reality, if you are an Australian citizen or fortunate enough to be citizen of a country that has a strong social security safety net, then it is likely that you will receive some social security benefits and the amount that you need to accumulate is less. The Association of Superannuation Funds Australia calculated that a couple in Australia, factoring in receiving social security benefits would require a combined superannuation balance of $690,000 in 2023 to be able to live a comfortable retirement of $71,723 per annum.

Considering my nature, and the fact that you are reading my blog on money, naturally it is more conservative to assume that you will not receive any social security benefits in the future. This conservatism will likely create more peace of mind, knowing that you can stand on your own feet. In saying this, if you do not achieve your retirement savings goal, it is comforting knowing that there is a safety net. A privilege that I am very thankful for.

How much do I need to save?

Knowing the amount of time you have until your desired retirement age, and the amount of capital you will need to accumulate, you are now able to determine your base savings rate.

Assuming you are age 35 and have 20 years to save and invest until retiring at age 55, and as a couple you have accumulated the average combined super balance of $115,328, as recorded by the Association of Superannuation Funds Australia 2023.  Then you would need to save $2,118 per month (pm) or $25,416 pa to be able to retire at age 55. This is assuming you earn an inflation adjusted return of 5% pa, which has been the average compound investment return of global share markets since 1900, as per the Credit Swiss Global Investment return yearbook 2023.

If you are in Australia and earning income as an employee, a good proportion of your savings will be automatically being invested in your super account as part of the 11% super guarantee contribution that your employer is obligated to pay. You should factor this amount in when determining the amount of money you need to save each month.

Example being, if you are earning the median combined household income of $92,872 per annum (Australian Bureau of Statistics 2023), and you are both employees, your employer will be contributing $10,215 to your super accounts. After the contribution super tax rate of 15%, the after-tax amount invested in your super is $8,683. Considering the above example of a couple age 35, who are required to save and invest $25,416 per annum to sustain a modest lifestyle in retirement. If we factor in your compulsory employer super contribution of $8,683, you will need to save an additional $16,733 per annum, or $1,394 per month from your after-tax income. This is likely going to be a far more achievable savings amount.

The illustration below shows the calculation of the above example.

Source: Calculator.net

How to calculate your savings rate?

To determine the amount you need to save each month, follow the link to the below calculator.

Investment Calculator

Calculator input instructions:

• Your target – this is your target retirement amount. The minimum I suggest is $1,165,500, which at a safe withdrawal rate of 4%, is an income of $46,620 pa.
  

• Starting amount – this is the total amount of accumulated assets you have. Do not include your home value in this, as you always need somewhere to live.
  

• After – this is the time period between your age and your desired retirement age. I suggest using 55 as your desired retirement age as this is the age on average that most Australians retire.
  

• Return rate – I suggest using an inflation adjusted investment return of 5% pa, which is the long-term return of the total world share market.

Time is your most precious resource. If you can begin saving and investing as early as possible, then the total amount you will need to save and invest will be lower, as a larger proportion of your final investment balance will come from investment earnings. Example being, if you begin at age 25 with no accumulated super or savings, you will only need to save and invest $1,430 pm or $17,160 pa as a couple.

The illustration below shows the calculation of the above.

Source: Calculator.net

The above two examples show the significant difference that starting your investment journey early has. Time is a precious resource. Start saving and investing now!

Conclusion

Now that you have a better understanding of how much you need to save and invest, and the value of each of your dollars, you are better equipped to balance the dichotomy in life of spending now to enjoy the moment or saving and investing for a brighter future.

There are different seasons in life, some more expensive and requiring more of your time than others. Therefore, there are no right or wrong amounts to save or invest, it’s different for everyone. What is important is that you are aware of the benefits of investing and getting time on your side by beginning your investing journey as early as possible.

My one recommendation for you - always invest something! It does not matter if it is only a small amount, you will not regret it!

The Financial Poet

Advice disclaimers: The principal purpose of this blog is to provide factual information and not provide financial product advice. Additionally, the information is not intended to provide any recommendation or opinion about any financial product.

The advice provided is general advice only as, in preparing it we did not take into account your investment objectives, financial situation or particular needs. Before making an investment decision on the basis of this advice, you should consider how appropriate the advice is to your particular investment needs, and objectives. You should also consider the relevant Product Disclosure Statement before making any decision relating to a financial product. This post specifically excludes personal advice.