BY LAURENCE SMITH, FINANCIAL ADVISER, UEM WEALTH
In a previous life, I was presenting a seminar about preparing for retirement. We were talking about what the right amount of money is to be able to retire successfully. A gentleman raised his hand and confidently stated that one needed one million dollars to retire successfully.
While that will not be the right amount for everyone (the actual correct answer is “it depends” and will be different for pretty much everybody), one million dollars of savings or investments is a significant milestone to achieve. It can also feel like it’s too far away when one is starting out.
If all I was doing was saving $100 each day without any interest, it would take about 27-and-a-half years before I accumulated $1,000,000. Thankfully, two key factors can make this journey much easier: time and compound interest.
Compound interest is a term used to describe the return earned by an investment, which is calculated based on what has been contributed and all the returns the investment has already earned. This is how many managed investments or superannuation funds work.
Assuming no taxes, a 6.5% per year rate of return (paid yearly), starting from a $0 balance, and aiming to hit $1,000,000, one would need to save at a rate of $74,105 per year over 10 years, $25,756 per year over 20 years, $11,577 per year over 30 years, or only $5,694 per year over 40 years. That is only $110 per week over 40 years to get from $0 to $1,000,000.
The difference is the compound interest earned. Over 10 years, the saver would accumulate $741,050 of their own capital on their way to $1,000,000, with only $258,950 of interest earned. Over a 40-year period, the saver only needs to save $227,760 of their own capital. The remaining $772,240 is earned in interest.
This is a simple example, of course, and there are many factors that could vary the result up or down: what investments to hold, where funds are to be invested, and what else is a priority at any given point during the savings journey will influence how much can be saved each year. Turning $227,760 into $1,000,000 certainly sounds like a magic trick worth exploring, though. This is truly an example of working smarter rather than harder.
Patience, discipline, and consistency play a huge part in every long-term savings plan. A financial planner can be a useful resource to assist you, not just in setting achievable goals but also in keeping you focussed on the next step towards them. If you’re unsure where you are in your wealth journey, consider starting a discussion with a financial planner to help you get moving.
General Advice Warning – this is untailored, general advice. It does not take into account your personal circumstances. You need to decide whether it meets your needs. UEM Wealth and Laurence Smith are both Authorised Representatives of Crown Wealth Group Pty Ltd (ABN 22 603 037 510 / AFSL #494274). Laurence Smith may offer services through UEM Wealth and UEM Group. Accounting services are provided by UEM Group. Financial services (financial product advice and dealing) are provided by UEM Wealth. To the extent permitted by law, although the same adviser may offer you services under the above businesses, each business is solely and separately responsible for the advice they each provide.
