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I’ve spent a lot of time on talkback radio this week talking about my new book. The No.1 question people ask is: if you are preparing for retirement in 10-15 years’ time, when should you start thinking about it, and what would you do?
My answer? If you want to have the financial confidence to retire in 10-15 years’ time, you need to think about your goals and ambitions, about your budget, and get comfortable with how to shape a financial position to fit, ideally sooner rather than later.
If you want to have the financial confidence to retire in 10-15 years’ time, you need to think about your goals, ambitions, budget and financial position.Credit: Getty
One of the most powerful levers you have in growing your retirement savings before retirement is time and the power of compound investment. Superannuation, invested well, at an average return of 7-10 per cent a year, can double in value every seven to 10 years through passive compound interest alone.
Most people don’t realise this and take it seriously only with four to six years to go. While that’s still a reasonable amount of time to improve your financial situation, if you can motivate yourself 10-15 years earlier and take a few critical steps, you could put yourself in a far better position.
The list of things you can do 10-15 years out from retirement isn’t especially tricky, but it does require some dedicated effort on your part. So do it once, check in once a year and know that your strategy is off to a running start.
Build a vision
If you don’t start thinking about what your own part-time or full-time retirement might look like before you get there, you might find it hard to motivate yourself to do the financial work early enough.
Become a bit more alert to what you might like your retirement to look like. Start to talk about and picture the holiday destinations you might visit and some projects and activities you might pursue when you have a more passive income. Think about where you’d like to live and start incrementally piecing together a vision for this stage ahead of time.
Take advantage of superannuation concessional contributions
Take the time to learn about superannuation concessions and how to use them. I know – it’s not the most riveting subject. But learn the basics and you’ll find that you can contribute up to $27,500 a year to your superannuation at just 15 per cent tax (and your employer is already putting some of this in).
If you can then scrounge around and find additional funds each year on top of the 11 per cent being contributed by your employer – which, I know, is difficult for some people in these challenging times – that money, once inside super, will start compounding. You’ll enjoy the magical benefits I discussed above of time and compound investing. Do it as early as you can!
Review how your superannuation is invested
The real power of compounding is achieved by investing your super in good quality, high-performing investments, appropriate for your own risk profile. If you’ve just let your superannuation fund choose investment options for you, you might not be maximising the growth opportunities.
Review the risk profile and investment mix that your superannuation fund has allocated for you and consider whether they are right for the level of returns you want and the risk you are prepared to take. Remember, superannuation is a long-term investment and the benefits of being proactive early are huge.
You can ask your superannuation fund for financial advice to review your investments within their fund too. Most of the time they’ll provide this to you as a part of their core services; they may charge a small fee. Don’t ignore this step.
Think about downsizing as an opportunity
A few years ago, the government made downsizing a lot more attractive. It allowed every person who sells their home over the age of 55 to make a one-off $300,000 tax-free contribution per person to superannuation. It’s called the downsizer concession, and it’s the easiest way to get a large lump sum into superannuation before retirement.
If you’re part of a couple, the concession is per person, so as a couple you could get up to $600,000 into super in one hit. When tied up in your family home, such funds would not be achieving a compound investment return that you could use to pay living and leisure expenses in retirement. Once in superannuation, and invested well, they can start to work for you, again leveraging the power of time and compound interest. If they grow at 7-10 per cent a year, they can double in value in the 10 years between ages 55 and 65.
Obviously, these are very general suggestions and there are plenty of other things you can do with good personal financial advice. But if you think about these four things 10-15 years before you think you might like to retire, you’ll be well on your way to an epic retirement.
Bec Wilson is author of How to Have an Epic Retirement, which is now available online and in all major booksellers. She writes a weekly email newsletter for pre- and post-retirees at epicretirement.net.
- Advice given in this article is general in nature and not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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