One of the most common, repetitive and negative thought patterns is financial uncertainty.
Left unaddressed it is like an undiagnosed cancer, a constant niggle that can eat away at your frame of mind in the short term with potentially catastrophic long-term consequences for both your health and your wealth.
Bumbling along day to day, trusting to luck, hoping that everything will be all right in the end is normal – you are not alone but you can do better. Not many people know their financial future but it doesn’t have to be that way.
Ask anyone who has confronted their financial future and they will tell you that whatever you find out, whether you are behind the financial eight-ball or ahead of it, just knowing where you are and where you are going will knock years off the ageing process, save you a fortune in beauty creams and botox and at retirement leave you ready to fly rather than ready to die.
So here goes … a quick formula for you to get a handle on your retirement, help work out roughly how much you need, when you will get there and whether you are financially under pressure or ahead of the eight-ball.
Grab your partner if you have one (but it works just as well on your own), open an Excel spreadsheet if you know how to use it, or a calculator and a pen and paper if you don’t, and get a handle on your retirement.
Start with a few simple questions:
1. If you had all the time in the world and the money to do it, what would you do?
I know what I would be doing in retirement. Nothing lavish, and it will probably change next year, but for the moment I would like to be travelling the world with Emma playing golf.
If you dumped enough money in our bank account to do that now, we’d up stumps before we can’t swing a club any more and before we have to be within 50 metres of a toilet at all times.
Most people don’t ever stop for long enough to ask themselves what they would prefer to be doing and as a consequence we all rush through life without a goal.
So stop now, grab your partner, pretend you have all the time and money in the world and work it out. What would you do? You might surprise yourself with the answer.
It might not involve million-dollar yachts and a Rolls-Royce. It might just involve doing something simple and cheap, like what you are doing now, forever.
2. How much will it cost to do whatever it is you want to do?
You can turn this into a complex calculation but I’ve kept mine simple and generous.
The Association of Superannuation Funds of Australia says a couple needs $1172 a week for a comfortable lifestyle in retirement but let’s do a bit better than that and say we need $2000.
That’s about $100,000 a year, tax free. Let’s budget on that. Emma and I need $100,000 a year between us to drop everything and play golf.
3. How much money do you need to generate $100,000 a year?
This isn’t so much a debate as a quick bit of factual maths. The stockmarket over the long-term returns about 6% plus dividends of around 4%.
But balanced funds earn less, equities are volatile and you could catch the wrong decade or a seismic once-in-a-lifetime event.
So let’s be conservative and say you are going to earn maybe 6%pa, which you can get in some low-risk bank hybrids as well.
To earn $100,000 a year tax free at 6% we would need $1.6 million in super. Let’s call this “X”, the amount of money we need in order to drop everything and do what we want to do. So that’s my “X”; what’s your “X”?
If you already have it, retire. If you are short, then the goal is clear. Get “X”.
4. How do you get to “X”?
On the assumption that you are going to collect “X” in a superannuation structure and will be contributing to that each year until you retire, there are two ways to get there.
The first is by earning a compounding return on your annual super balance, and the second is by making contributions to your super to bump up the capital on which you earn that return.
This will probably require the spreadsheet or the pencil and paper, but the calculation is fairly simple.
It’s about tracking your future super balance progress year by year. Start with the amount in super now.
That’s year zero. In the next column, year one, which is the current year, multiply the current super balance by a return, say 6%, and add any super contributions, say 9.5% of your (combined) salaries.
That’s how much you should have in super at the end of this year. Then do the same again for year two using the new year one super balance.
Again, add an annual return (say 6% again) on the new balance and add any super contributions that year.
That’s your likely super balance at the end of two years. Now repeat for year three and onwards until your balance gets to “X”.
That’s how many years you have until retirement and if you are ahead of the eight-ball you are done.
You have a goal, some certainty based on conservative assumptions and you can spend your salary as you like while your super takes the strain as it builds up to “X”.
5. What if I don’t get to “X” in my lifetime?
You’re behind the eight-ball. Don’t worry, most people are. You have a few options. Start to fiddle with the assumptions.
Assume a higher return and see what that does to the calculation; assume higher contributions, paying 15% into super instead of 9.5%; assume a longer working life; assume there are two of you making contributions rather than one.
There are all sorts of ways to massage the numbers but in the end you are going to work out through this simple formula whether you are ahead or behind and even if you are behind in that knowledge you can start to make a few simple financial decisions that, if you have long enough, could bring forward your retirement by years if not decades.
And if it still doesn’t work you still have a few options left. The first is to lower your expectations – happiness is expectations met but you need realistic expectations, so set new ones. The next is to change your lifestyle to save more, in and out of super.
Stop buying cars you can’t afford – financial vanity when you are not rich is not cool. Reduce your debts, push for a higher salary, negotiate lower fees, get more ambitious, assume you work until you are older … it’s endless.
Finally, your last option, if it still doesn’t add up, is the aged pension.
Set that as your expectation and it’s expectations met once again.
Whatever you find out by simply addressing a few financial uncertainties, alone or as a partnership, will set your expectations, deliver some financial benchmarks and allow you to go into tomorrow worrying about the day, rather than the future, because your future is a certainty at last.
This is not financial advice, it is simply questions and maths. It does not replace your need to see a financial planner or seek out professional financial advice.