Top 5 rules of thumb for retirement savings
There area few fundamentalsit’s worthwhile keeping in mindwhen it comes to retirement savings planning. Here’s a selection to consider.
How much do I need to retire on? – The Australian Securities and Investments Commission (ASIC) suggests that as a rough guide, you should multiply the annual income you want at age 55 by 19; at age 60, by 17; and at age 65, by 14.
Another way to estimate the figure you will need is to look at different amounts of accumulated superannuation, and consider how long that amount will last you, taking into account how much you will draw each year, and the rate of return earned on your super.
Don’t put money in something you don’t understand – If the only investment you currently understand is a savings account, park your money there while you learn about slightly more sophisticated investments like managed funds, which are typical investments most people need to understand to build a solid retirement portfolio.
Don’t ever let salespeople or advisers talk you into buying something you don’t understand. They might have your best interests in mind, or they might just be trying to sell you an investment that will earn them a commission. Until you educate yourself about the different investment options, you’ll have no way of knowing.
The 50/30/20 Rule - This is a popular rule for breaking down your budget that puts 50 per cent of your income toward necessities, like housing and bills, 20 per cent to financial goals, like paying off debt or saving for retirement and 30 per cent to wants like dining or entertainment.
There are also variations to this rule, like the 80/20 rule, in which you use 20 per cent of your income for financial goals, then spend 80 per cent on everything else. If you’re not sure where to start with a budget, breaking it up into these basic categories can be really helpful. Those percentages help create a balance between obligations, goals and splurges.
Buy and hold – Adopting a buy and hold investment strategy means that even if you choose investments that charge a commission, you won’t pay commissions very often. This rule of thumb also means that you won’t let your emotions dictate your investment decisions. When people follow their emotions, they tend to buy high and sell low. Numerous studies have shown that you’re better off keeping your money in the market even during the worst of downturns.
Start saving now – Ideally, you would have started saving for retirement the moment you started earning income, which for many of us was at 16 when we got that after-school job at McDonalds or the movie theatre or sandwich shop. However it’s never too late to start, regardless of your stage of life or circumstances, in order to optimise your nest egg for when you really need it.