There’s a ticking time bomb waiting for some Australians as a $2 trillion wealth gap means they can’t afford to stop working, but there’s a smart way to get around this.
Australians are headed for a future financial shock as they face an income in retirement 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 successful with your money. There is no set of steps that everyone can follow that will guarantee the results you want, because the steps that are right for you are up to you.
What is important for you? What is happening with your money? How do you want your life to be in the future?
Here are three common challenges everyone faces when trying to get ahead with their money.
There is so much noise out there that it makes a smart money move. Whether it’s investments, money strategies, property, or taxes, the options are overwhelming.
There are a lot of conflicting opinions, conflicting messages and hidden agendas – it’s hard to know who to listen to or who to trust.
Strike a 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. Live in a good house in a good location. Possibility to spend on trips and experiences. Work at a job that brings you happiness. These are all things that come at a cost, and finding a balance between what is most important here and investing for the future is challenging.
FOMO and FOMM
Psychology often works against you when it comes to investing and making decisions. You suffer from the fear of missing out (FOMO), and particularly when making investment decisions, you don’t want to be the one left behind.
But you also suffer from the fear of being wrong (FOMM) which can be paralyzing. 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 silly that costs you a ton of money.
What’s the score?
The end result of these challenges is that you get stuck. Not necessarily stuck doing nothing, but you often end up stuck just doing the same things you’ve been doing in the past, often missing out on an opportunity to make your money work harder and get 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 advance:
start your super
Building your super gives you a ton of tax benefits today, and the money inside the super can grow faster due to the low tax rates inside the super funds.
When it comes to covering your future expenses, the super also has the great advantage that your money is essentially ‘locked in’ until you reach retirement age. This means that the money will be there when he needs it.
Under current super rules, you can contribute up to $27,500 each year (including super contributions from your employer) to your super fund and claim this as a tax deduction. This can seriously lower your tax bill and speed up how quickly your superfund grows.
Look into the future
If you want to increase your investments to eventually replace your salary, you need to save and invest a certain amount of money today. Whether you wait a month, a year, or five years, the amount you need to save increases as time goes on.
Your goal should be to set a clear goal for how much money you need to have to retire 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 about 5 percent of your investment assets, so if you have a $1 million worth of stock portfolio, it should earn you an income of about $50,000 annually. .
Once you have your number, you’ll want to see where you are today and how your investment assets are expected to grow in the future if you continue to do 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 handy with a spreadsheet or some of the available online calculators, you may be able to do it yourself, but given the importance of this piece, don’t be afraid to ask for help here if you need it.
So you don’t have to catch up in the future, take the time to look ahead at the financial path you’re on. This way you’ll be able to gauge how well you’re 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 asset building and help you reach your wealth-building milestones faster. It comes with risk, so you need to be smart with your planning around this, but using good debt wisely can go a long way when it comes to closing your potential retirement wealth gap.
If you are borrowing to invest, it is important that you carefully choose a good asset or investment that will really grow and give you the results you are looking for. You should also make sure you have a good risk and downside management plan in place so you don’t fall short.
Take the time to understand what you can do to close the potential retirement wealth gap for yourself, then take action.
Educating yourself is the key here, to overcome the inaction trap and build confidence in your approach. Your money is a muscle that you build over time.
When you do this right, you can take financial initiative and prepare to work toward your own version of financial success, and avoid having to settle for less in the future.
Ben Nash is an expert finance commentator, podcast host, financial advisor, and founder of Pivot Wealth, and the author of the Amazon bestselling book ‘Get Unstuck: Your Guide to Creating a Life Unconstrained by Money.’
Ben just launched a series of free online financial education events to help you take financial initiative. You can check all the details and reserve your place 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 consider whether the information is appropriate for your circumstances before acting on it and, where appropriate, seek professional advice from a financial professional.