Thank you to Lisa Weissel for providing us with some great information for parents in this weeks guest blog post!
Guest Post from Lisa Weissel
We keep hearing about the “adequacy gap” in retirement savings and how the Age Pension and other income assistance is costing tax payers up to $96 Billion a year and that this is only going to continue to rise. Yet what can be done?
The Super Guarantee is certainly helping to address this need, but will it be enough? And what about those who are unable to work for some or all of their normal working lives?
One simple solution is in understanding the value of time in the market. By putting away a small amount early on in a child’s life and letting it grow over time, the magic of Compound Interest can work for each and every investor as they have the time to ride through the ups and the downs.
In 2002 the Federal Government changed superannuation legislation to allow Australians as young as one day old to open a super account. All that is effectively now required is a birth certificate and a tax file number.
With no work requirement until you reach 65 years of age, this provides all Australians the opportunity to make the most of time in the market.
Superannuation is portable, adjustable and can be added to at any time. So the average 30 year old, if they have been working for about ten years at that point, can expect to have around $60,000 in superannuation savings (based on SG contributions with an average salary of $40,000pa over that period).
However, by investing the equivalent of $1,500 from birth into superannuation when a child is young, there is the opportunity to provide a potentially large helping hand towards retirement in the years ahead.
With this head start, that same 30 year old could have over $110,000 saved towards retirement, allowing them to focus on important lifestyle considerations rather than retirement savings.
Investing $1,500 through superannuation for a child when they are born, earning at an average net rate of 14.4% pa* by investing in quality growth assets, can provide an invaluable gift even if it is never added to. Whilst superannuation cannot be accessed until age 60 (under current legislation), the child faces no personal tax consequences (as it is inside the superannuation environment) and at that rate, the $1,500 gift has the potential to grow to around $5,496,000, simply compounding on itself.
In real terms, that gift of $1,500, after allowing for inflation at an average 2.4% pa over that 60 years, has the opportunity to grow to around $1,507,000 in today’s dollars. Enough to potentially buy a house (or pay one off) and have an income of $1,000 per week for the rest of their lives, tax free.
Make the most of Superannuation and provide a wonderful potential gift, as well as teaching the lessons of compound interest and Time in the Market.
By Lisa Weissel
Certified Financial Planner – 02 6241 4411
* ASX300 produced 15.3% pa over 30 years to December 2008.
* ASXORD produced 13.3% pa over 108 years to December 2008
* ASXORD produced 12.0% pa over 30 years to June 2012.
* ASXORD produced 12.6% pa over 40 years to June 2015.
Data for these returns has been supplied by Vanguard Investments and Andex Charts Pty Ltd and is believed to be correct. No responsibility is accepted for inaccuracies or omissions.