‘Serious challenge’: How to avoid the Australian retirement gap

We all know it’s hard to get ahead right now – but a horrifying new statistic has revealed just how screwed many Aussies truly are.

In Australia, the retirement gap is a serious challenge, with most people retiring on around 30 per cent of the average Australian income, according to data from Canstar.

I don’t know about you, but working for decades just to be forced to make drastic lifestyle sacrifices in the future seems far from ideal.

But there is another way.

If you’re smart about how you go about things, with time on your side you actually don’t need to do a lot to grow a significant amount of wealth – but you do need to do something. Consider this example.

The table below shows how much money you’d need to save and invest each day to build $3 million in investments over time. This example is simply based on the long-term sharemarket return of 9.8 per cent, something you can easily get from an index fund that doesn’t require any complicated share picking or even a financial adviser.

You can see from these figures that if you’re 20 years old, you only need to save $9.96 each day to grow $3 million in investments by age 65. But the longer you leave it, the more you need to save and invest to end up in exactly the same position. If you wait until you’re 40, you need to save more than $76 daily to end up in the same position, and if you’re 55 it’s more than $483 each day.

If you leave it too long, it gets close to impossible – which is a big part of why the retirement gap problem is so large in Australia today.

Know where you’re headed

When I share these sorts of figures with people, most of the time they’re surprised.

People don’t realise that investing such a small amount of money consistently can create such a large amount of wealth.

If they’re young, they’re often excited by the possibilities. But when older people see this, they often say that they wish they knew what they needed to do sooner. But this isn’t a secret – anyone can see this information online by using a simple compound interest calculator like the one on the government’s MoneySmart website.

When it comes to money, anything is possible – it’s simply a matter of which levers you want and don’t want to pull. Picture: iStock

Tools like this can help you to understand the path you’re on with your money, what I refer to as your financial trajectory. Being clear on the path you’re on is the first step that allows you to understand if what you’re doing today is enough to get you to where you want to be, or if you need to crank things up a notch.

From there, once you know where you want to go, you can put a plan in place to get there. Without this plan, it’s impossible to know where you need to get to, when you can expect to get there, and whether you’re on track.

This means one of the first things you need to do with your money is to get clear on your financial trajectory. As the saying goes: a dream without a goal is a wish, a goal without a plan is just a dream.

You just need a starting point

For most people, the first time you map out your financial trajectory, you probably won’t be on track to end up exactly where you want to be, exactly when you want to be there (sorry).

Knowing you’re not on track is a good thing, because it will tell you how big the gap is between the path you’re currently on and where you want to be. This gap will dictate exactly how much action you need to take to close the gap and get on track for the future financial results you really want.

To map out your financial trajectory, you’ll need to take stock of your finances today, how much you have in savings, investments, superannuation and property, and any debts. Importantly, you’ll need to know how much money you have available that you can save each week or month to direct to growing your investments and wealth.

Once you have these figures, if your situation is simple you can use a compound interest calculator to look at the impact of saving and investing different amounts and what it will mean for how your money will grow.

If your situation is more complex and you’re good with spreadsheets, you can possibly map this out yourself, or consider using a professional financial planner to help.

Whatever way you do this, know that it will take an investment of time and/or money – but if you want to make sure you avoid the Aussie retirement gap and being forced to make drastic sacrifices in the future, your investment will be worth it.

Simple actions today will have a huge impact tomorrow. Picture: iStock

The wrap

When it comes to money, anything is possible – it’s simply a matter of which levers you want and don’t want to pull. Saving more, spending more, how much you invest, how long you work for and at what capacity, how much tax you pay and the list goes on – these are all variables that will either dial up or down your rate of financial progress.

Most people cruise along, doing things without thinking too much about the impact their decisions are having on their money today and into the future. Follow this approach and you might get lucky and end up exactly where you want to be, but most likely you won’t.

Instead, put yourself in the driver’s seat. Make active choices and define your own financial path forward – this will give you a much better chance of ending up in the position you want to be in.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, and author of soon-to-be-released Book, Virgin Millionaire.

Ben runs regular money education events to help you save more and invest smarter. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.