Ben Nash has issued a warning for Australians who may be falling into a retirement trap that may leave them worse off in their golden years. · Getty/Ben Nash
For decades, Aussies have been told the same story — work hard, buy a home and pay it off, and grow your super, and you’ll be sorted for retirement. Now on paper, this sounds safe.
But in reality, this can be a trap that leaves you asset rich but income poor. And just to be clear, this isn’t because of poor planning or bad habits.
It’s about following outdated advice and rules for a game that’s permanently changed.
When most people think about being ‘ready’ for retiring from work, they look at two main numbers.
Firstly, how much is left on their mortgage. And second, how much money they have in super.
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On the surface, these are good measures.
But there’s a catch – because you can’t pay for your groceries with equity in your house.
And your super may not deliver you the income and lifestyle you think it will — especially if you’re aiming for a lifestyle more than just affording the bare essentials.
For example, with $500,000 in your super fund, you can sustainably take an income of around $25,000 each year.
That’s around 25 per cent of the Australian average income, and nowhere near enough to support the hobbies, lifestyle, travel, and family support most people want for their retirement years.
This trap comes about as a result of three common assumptions.
The first is ‘pay off the mortgage first’, which is good advice for reducing risk, but it often leads to a costly delay in investing and leveraging the power of compound interest.
Next is ‘my super will look after me’, which ignores the fact that most super funds are set up for long term growth, not generating an income that can fund your retirement lifestyle.
And the final one is ‘I’ll spend less when I’m old’, which is often false.
For most people, the first decade of retirement is one of the most expensive of their lives, because they’re healthy and active, and finally have the time to do the things they’ve always wanted to.
The good news is that avoiding this trap isn’t about just working for longer or drastically cutting back on your lifestyle.
It’s about rethinking how you grow your money today so you have more options later.
Owning your own home is a great position to be in — but if it’s your only asset, you’ve got a problem.
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Instead, you need to have investments that pay you an income.
This means having your money held in assets that produce regular, sustainable income.
Things like share investments that pay dividends, property assets that generate rent, or even a business or private investments that deliver you distributions.
The sooner you start building these, the less you’ll need to rely only on your super fund.
To get started, work out how much assets you’d need to replace your current level of income, which you can do by using the ‘5 per cent rule’.
Then look at how much you have in investments outside of your home.
If the gap between these two numbers is large, it’s time to focus your next investments more on generating you an income.
Superannuation is a powerful tax effective investment platform, but most people just set and forget.
That may be OK in your 20’s and 30’s, but in your 40’s and 50’s, your investment mix and super strategy should be deliberate.
This might mean making some extra tax deductible contributions to your fund to leverage the tax benefits, or adjusting your super investments to include more that generate a higher income — or both.
If you haven’t reviewed your super in a while, now is the time to make sure everything is sorted.
Take the time to understand your likely retirement income based on your super fund today, not just your overall balance.
Balance debt repayments and investing
Smashing down your mortgage can feel satisfying, but if this comes at the expense of investing, you’re essentially trading off your future income for a bit more comfort today.
Taking a balanced approach, where you pay down debt and invest will mean you arrive into your retirement years with a paid off home and income producing investments.
Run the numbers on splitting your monthly savings between mortgage repayments and investing.
If you get stuck on the details or aren’t good with spreadsheets, consider using a professional adviser to help you model out the optimal split between these goals.
The retirement trap comes from confusing security with freedom.
A paid off home and healthy super balance can give you security, but real freedom comes from having income that can fund your lifestyle without draining your capital.
The old formula, pay off the house, grow super, then retire — still has value, but it’s not a complete strategy.
The people enjoying the most comfortable retirements today didn’t just aim for a small super fund, they have built assets that pay them an ongoing, sustainable income.
Start building those income streams now, and you’ll not only avoid the retirement trap, but you’ll give yourself the options to retire earlier, work less, or take more time off along the way.
Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth. Ben’s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon | Audiobook.
If you want some help with your money and investing, you can book a call with Pivot Wealth here.
Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.