Smart investing can see you make $50,000 a year in passive income

There’s a time bomb waiting for some Aussies as a $2 trillion wealth gap means they can’t afford to stop working – but there’s a clever way to overcome this.

Aussies are heading towards a future of financial shock as they contend with an income in retirement that is significantly lower than their current salary.

According to the Australian Financial Services Council (FSC), as a country we are facing a retirement income gap of over $2 trillion dollars.

But what can you do about it?

Unfortunately, there is no silver bullet solution to being successful with your money. There isn’t one set of steps that every person can follow that will guarantee the results you want, because the right moves for you depend on you.

What’s important to you? What’s going on with your money? What 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.

Information overload

There’s so much noise out there around what makes a smart money move. Whether it’s investing, money strategies, property, or tax, the options are overwhelming.

There are a heap of conflicting opinions, mixed messages, and hidden agendas – it’s hard to know who to listen to or who to trust.

Finding balance

The next challenge you face is finding the perfect balance between getting ahead with your money and living the lifestyle you want. And it’s not easy.

We want it all. Living in a good home in a good location. Ability to spend on travel and experiences. Working in a job that brings you happiness. These are all things that come with a cost, and finding a balance between what’s most important here and investing for the future is challenging.

FOMO and FOMM

Psychology often works against you when it comes to investing and decision-making. You suffer from the fear of missing out (FOMO), and in particular when making investing decisions you don’t want to be the one that’s left behind.

But you also suffer from the fear of making a mistake (FOMM) which can be paralysing. You work hard to build up some savings and investments, and when it comes to putting that money to work, you don’t want to do something dumb that costs you a bunch of money.

Fear of making a mistake can stop a lot of people from starting their investing journey. Picture: iStock

What’s the result?

The ultimate result of these challenges is that you become stuck. Not necessarily stuck doing nothing, but often you end up stuck just continuing to do the same things you’ve been doing in the past – often missing out on the opportunity to get your money working harder and getting more out of what you have now.

This inaction is one of the key drivers of the Australian wealth gap, and something you need to overcome if you want to avoid being part of these statistics.

How to move forward:

Crank your super

Building your super gives you a heap of tax benefits today, and money inside super is able to grow faster because of the low tax rates inside super funds.

When it comes to providing for your future spending, 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 each year (including your employer super contributions) to your super fund and claim this as a tax deduction. This can seriously cut your tax bill and accelerate how quickly your super fund grows.

Look ahead

If you want to build your investments to eventually replace your salary, you need to save and invest a certain amount of money today. If you wait a month, a year, or five years, the amount you need to save gets bigger as time goes on.

Your aim should be to set a clear target for how much money you need to have to retire on and the income you want in the future. The rough rule of thumb here is that you should be able to generate an income of around 5 per cent from your investment assets, so if you have a share portfolio worth $1 million it should generate you an income of around $50,000 annually.

A share portfolio will typically provide an income of around 5 per cent of its investment asset.

Once you have your number, you’ll want to look at where you’re at today and how your investment assets are expected to grow into the future if you keep doing what you’re doing today. This will help you understand if you need to make any changes to how much you’re currently saving and investing.

If you’re handy 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 engage some support here if you need it.

So you don’t have to play catch-up in the future, take the time to look ahead at the financial trajectory you’re on. This way you’ll be able to assess how well you’re tracking, and what you need to change to end up exactly where you want to be.

Gear up

Borrowing to invest is a strategy that can supercharge your asset building and help you hit your wealth building milestones faster. It comes with risk so you need to be smart with your planning around this, but using good debt in a smart way can be a huge help when it comes to closing your potential retirement wealth gap.

If you’re borrowing to invest, it’s important you carefully choose a good asset or investment that will actually grow and deliver the outcomes you’re looking for. You should also make sure you have a good downside and risk management plan so you don’t get caught short.

The wrap

Take the time to understand what you can do to close the potential retirement wealth gap for you, then take action.

Educating yourself is the key here, to push through the inaction trap and build confidence in your approach. Your money is a muscle that you build over time.

When you get this right, you can get on the front financial foot, 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 a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, and author of the Amazon best-selling book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben has just launched a series of free online money education events to help you get on the front financial foot. 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.