I have been asked many times – “How much money do I need to retire on?”
My answer is always the same – “it depends on what your living style will be when you retire”. If you are going to take an overseas holiday every year and lavish those around you with gifts – then you will need a lot more than someone who has no real plans or needs for anything and is happy taking life easy and staying put.
What about your children as they are starting out on life’s journey and how can they make enough to have funds for their retirement? (One way is to get it from you! But maybe you will spend it all – or you don’t have enough to cover another generation…or simply don’t want to!)
Years ago – people used to think $1,000,000 was enough to retire on. For many, it still is! So how does your 25yo child make $1m before retirement?
Example: Let us assume your child has a job with a salary of $60,000 per year. After tax of $12,200, they will have $47,800 of disposable income. Let us further assume they have already saved $10,000.
The golden rule of investing is to invest first and live off what is left after investing. So your child invests $1,000 per month direct from their salary. That leaves them with $35,800 to live and pay all their bills etc. ($690 per week).
The important thing is that the investment is made first!
Let us assume they invest that in a long term investment – (example: the sharemarket) on the basis of the original $10,000 plus the $1,000 per month.
Let us assume the long term rate of return, year on year, is 6%. (That might be 3% dividends and 3% growth after tax and special tax credits).
If they do this, after 30 years (age 55) (yes, sounds a long time; but as parents it is your job to explain life to them and how time flies!!) they will have $1,006,013. That is the original $10k plus 360 times $1k = $370,000 invested……………but it will be worth over $1,000,000! Think about that.
Now that makes no allowance for higher earnings in their job and extra investing – just $1,000 per month – every month.
Now for the killer point – if your 25yo child “says – yeah, Ok – but I’ll wait 5 years before I start”, they will only have $702,000 at age 55…$300,000 less! Conversely, if they started 5 years earlier but only invested $700 per month until age 55, they would have the same outcome of $1,006,000,
I encourage you and your children together to look at the Money Smart website (just Google “Money Smart”). Click on “calculators” and then “compound interest” and then enter some figures and see what you can come up with. Play around with less years, more or less invested per month and see the massive difference the end result is if you invest for less or start later!
My point? Compound interest – (where your investment dollars earn growth on your growth) is incredibly powerful over time! The earlier you start in life – the far greater return you will get in future years. Get your children to start this journey now!
This example is to highlight the importance of starting investing early and doing it regularly. If your child can’t invest $1,000 per month, start with $500 and so on. The important thing is to START and keep doing it! They can’t go wrong!
