A ticking time bomb awaits some Australians as a $2 trillion wealth gap means they can’t afford to stop working – but there’s a clever way to overcome this.
Australians are heading into a future of financial shock as they face a retirement income that is significantly lower than their current salary.
According to the Australian Financial Services Council (FSC), as a country we face a retirement income gap of more than $2 trillion.
But what can you do about it?
Unfortunately, there is no silver bullet to be succeed with your money. There isn’t a set of steps that every person can follow that will guarantee the results you want because the right moves for you are up to you.
What is important to you? What happens with your money? What do you want your life to look like in the future?
Here are three common challenges everyone faces when trying to get ahead with their money.
There is so much noise around what makes smart money move. Whether it be investmonetary strategies, property or taxation, the options are overwhelming.
There are a lot of conflicting opinions, mixed messages and hidden agendas – it’s hard to know who to listen to or who to trust.
find the balance
The next challenge you face is finding the perfect balance between moving your money forward and living the lifestyle you want. And that is not easy.
We want it all. Live in a good house in a good location. Ability to spend on travel and experiences. Work in a job that brings you happiness. All this has a cost, and it is difficult to find a balance between what is most important here and investing for the future.
FOMO and FOMM
Psychology often works against you when it comes to investing and making decisions. You suffer from fear of missing out (FOMO), and especially when making investment decisions, you don’t want to be the one left behind.
But you also suffer from fear of being wrong (FOMM) which can be crippling. You work hard to accumulate savings and investments, and when it comes to putting that money to work, you don’t want to do something stupid that costs you a lot of money.
What is the result ?
The ultimate result of these challenges is that you get stuck. Not necessarily stuck doing nothing, but often you find yourself stuck doing the same things you did in the past – often missing the opportunity to make your money work harder and make the most of what you have now.
This inaction is one of the main drivers of Australia’s wealth gap, and something you need to overcome if you want to avoid being part of these statistics.
How to move forward:
Launch your super
Build your super gives you a bunch of tax benefits today, and the money inside the super funds is able to grow faster due to the low tax rates inside the super funds.
When it comes to providing for your future expenses, super also has the big advantage that your money is essentially “trapped” until you reach retirement age. This means the money will be there when you need it.
Under the current super rules, you can contribute up to $27,500 per year (including super contributions from your employer) to your super fund and claim that as a tax deduction. This can significantly reduce your tax bill and accelerate the growth of your super fund.
If you want to build your investments to eventually replace your salary, you need to save and invest some money today. If you wait a month, a year, or five years, the amount you need to save increases over time.
Your goal should be to set a clear goal for the amount of money you need to retire and the income you want in the future. The rough rule of thumb here is that you should be able to generate about 5% income from your investment assets, so if you have a stock portfolio worth $1 million, it should you generate an income of about $50,000 per year.
Once you have your number, you’ll want to see where you are today and how your investment assets should grow in the future if you keep doing what you’re doing today. This will help you understand if you need to make any changes to the amount you are currently saving and investing.
If you’re comfortable with a spreadsheet or some of the online calculators available, you may be able to do this yourself, but given the importance of this piece, don’t be afraid to hire a help here if you need it.
So that you don’t have to catch up in the future, take the time to anticipate the financial trajectory you’re on. This way, you’ll be able to gauge the quality of your tracking and what you need to change to end up exactly where you want to be.
Borrowing to invest is a strategy that can boost your wealth building and help you reach your wealth building milestones faster. It comes with risks, so you have to be smart about your planning in this regard, but using good debt the smart way can be a big help when it comes to closing your potential wealth gap in retirement.
If you are borrowing to invest, it is important that you carefully choose a good asset or investment that will actually grow and produce the results you are looking for. You also need to make sure you have a good risk and risk management plan so you don’t get caught out.
Take the time to understand what you can do to close the potential shortfall in your retirement wealth, then take action.
Education is the key here, to get out of the inaction trap and build confidence in your approach. Your money is a muscle that you build over time.
When you are successful, you can take the financial lead and set yourself up to work towards your own version of financial success – and avoid having to settle for less in the future.
Ben Nash is an expert finance commentator, podcaster, financial advisor and founder of Rotate Wealthand author of Amazon’s bestsellerGet Unstuck: Your guide to creating a life not limited by money‘.
Ben has just launched a series of free online financial education events to help you get ahead financially. You can check all the details and reserve your spot here.
Disclaimer: The information in this article is general in nature and does not take into account your personal goals, financial situation or needs. Therefore, you should determine whether the information is appropriate for your situation before acting on it and, if necessary, seek the advice of a financial professional.