If you know only one thing about wealth-building for your retirement, it should be this: your most valuable asset is – wait for it – time. This is because it is much cheaper and easier.
Putting that another way, the sooner you start, the better off you will be – far more effortlessly.
Here’s how much you need to save in your superannuation – we will assume an average annual 7 per cent investment return – to amass $1 million by age 60.
Start late at age 50
You should already have guessed that by this age, becoming a millionaire by age 60 is going to be painfully expensive.
It is going to take saving a whopping $5778 a month to build $1 million in the 10-year timeframe. (With apologies if this sounds like you!)
Note, too, that, of the $1 million, the retirement saver has to find $693,360. Just $306,640 is delivered by investment returns. So, what should you do instead?
Start at age 40
If you invest to fund income for your retirement lifestyle from age 40, the monthly amount you need to contribute drops significantly from $5778 to $1921 – less than half of the 50-year-old
And the younger you start your retirement savings, the dramatically cheaper it gets.
Start at age 30
The required monthly saving is now just $820 – remembering that the 50-year-old was on the hook for an enormous $5778.
The total proportion of money you have to find versus investment earnings also drops to 30 per cent, or $295,200.
However, the very best option of all is:
Start at age 20
Here, you need just $381 a month to become a millionaire by age 60. It is a cheap option considering the $5778 the 50-year-old has to find, $1921 the 40-year-old has to furnish or the $820 the 30-year-old requires.
At 20, you only have to contribute just $182,880 yourself – the rest of your $1 million comes from investment returns.
Thinking of it another way, more than 80 per cent is “free” money.
Could a 20-year-old afford $381 a month? Well, it works out at just $12.50 a day – barely lunch money these days.
For added motivation to start early, our 30-year-old would need to pay $27 daily and the 40-year-more than $60.
All this illustrates the power of compounding interest.
No matter what your age, it will work best for you if you start investing as soon as you are able.
The key to earning the returns quoted, calculated with the excellent tool at moneysmart.gov.au compound-interest-calculator is not to cash out any of your investment or earnings.
You need to make returns on returns – or interest on interest if you instead put your money in the bank. Of course, there would be tax to pay on these earnings.
However, if you invest within the tax-advantaged environment of superannuation – where you can make contributions before income tax and pay only a 15 per cent contributions tax – you could become a millionaire faster.
Start today because your most powerful asset is time.