22nd April 2009 Principal & Head of Retail, Vanguard Investments Australia
Some birthdays are more influential on our investment outlook than others.
A friend turned 50 recently and along with an enjoyable celebration of a life's journey so far she admitted notching up a half century had powerfully turned the mind to issues around superannuation and retirement.
No-one can control - or even accurately predict - market performance. But there is another critical factor that is largely beyond our control - our time horizon. As much as a 50-year-old might like to wind back the clock (50 apparently is the new 30 in marketing speak) we can't. Our time horizon may well be extended courtesy of medical advances and healthier lifestyles but by and large we are relegated to investing over one finite time series.
So when you dissect a super portfolio there are really only three components - contributions, investment returns and costs. Of that trio we can control costs - although not entirely eliminate them - and contributions. We have to accept - and the events of the past year have reinforced the fact - that we cannot control future market performance and hence accurately plan what investment return will be delivered.
March was a good month for super funds - the first positive returns since August last year - and it has provided some welcome relief and perhaps a reminder that while no-one can forecast when our economy will begin growing again it will happen at some stage.
But when you look at your retirement savings plan - particularly if you are 50 - it is worth understanding what extra contributions might have to be made to help rebuild your portfolio.
Consider the case of a 50-year old who earns $75,000, wants to retire at 65 and has a super balance today of $200,000. Projecting forward for a typical growth portfolio she had used a (not unreasonable) return rate of 8.5%. Given the current market conditions and the prospect of a slow recovery out of the recession we are now in she re forecasts her retirement savings using a 6% annual return rate. The difference is $117,000 less for her to retire on. That is going to either impact significantly on her lifestyle or if she continued to spend at the current rate run out of money several years earlier.
So using the lower growth return assumption she wants to know what extra contributions would be needed to get her back to her target retirement savings figure.
Her previous target was to have a portfolio worth between $450,000 and $500,000 by age 65. From her current balance she would need to contribute an additional 10% through a salary sacrifice arrangement to be on track to have a portfolio worth $450,000 assuming a 6% return rate.
Now for some people contributing an extra 10% may not be possible because of existing financial commitments. Indeed to some people this may feel like taking a pay cut but even if another 3-5% in contributions to super will make a significant difference.
In reality you are spending less today in order to have more available to spend in retirement. And for people in their 50s large financial commitments - mortgages, school fees, car loans - are often reducing dramatically or disappearing entirely which does allow headroom to consider extra contributions either to super or other forms of saving.
Whatever the reason - significant birthday or because the market has recovered slightly - checking in to see how you are tracking with your retirement savings goal and being prepared to consider altering your contribution level makes good sense.
