Thursday , July 9 2020
Home / Latest News / There’s a better way to fund your retirement

There’s a better way to fund your retirement

The first thing to do is work out a reasonable retirement lump sum. The government has capped pension-phase super at $1.6 million, so let’s say that is the target.

Next, let’s say that retirement age will be 70 for those who are yet to enter the workforce.

Now, let me spitball some numbers.

If the average worker earns about $3.3 million in their lifetime, even if the compulsory employer contribution stays at 9.5 per cent of income, that is a benefit of $313,000 towards super.

And if the average worker starts saving (indirectly through their employer) in a “balanced” super fund between the ages of 25 and 70, they would probably earn 6 per cent to 7 per cent (again in nominal terms) over 45 years.

But here is where it gets interesting. Let’s change some of the assumptions.

Let’s assume a rough-but-not-unreasonable return of 9 per cent from investing in shares across the world’s developed markets, over the long run, including the benefit of saving about 1 per cent per annum in fees charged by your super fund.

And what if, instead of waiting until 25 for super contributions to be made, they were made from birth.

I hope you’re sitting down. See, to get to $1.6 million, in nominal terms (and assuming you would earn 9 per cent per annum for 70 years), you would need to invest only $4000 for a baby born today to have $1.6 million in 2090.

And using the Future Fund (or something similar) to invest, the retirement pool would keep costs to almost zero – or exactly zero if you covered the costs in the federal budget. That’s compared to the $313,000 worth of employer contributions.

Now, let’s say you want to include inflation. And you think my return estimates are too high.

No worries – a real return of 6.5 per cent would see you investing $20,000 for each baby born today if you wanted to end up with $1.6 million. Much higher than I think you could get away with, but still just 6.4 per cent of the money employers would otherwise contribute during a worker’s lifetime.

There are about 300,000 babies born in Australia each year. So, that would cost the taxpayer $6 billion each year. But probably much less than $3 billion, and maybe as little as a billion. That’s an impost, to be sure.

However, at a midpoint of $3.5 billion it would be only 0.7 per cent of the federal budget and just 0.2 per cent of yearly Gross Domestic Product. And the contributions could be indexed to GDP, inflation, or a combination of both.

Loading

The upside: as these kids start to enter the workforce in 16-20 years’ time, employers would not have to pay a single cent in compulsory superannuation.

The total pool could be invested, essentially without cost, not only on the Australian Securities Exchange but in sharemarkets around the world.

If we really do care about a competitive labour market, the state of the federal budget and leaving future generations better off (rather than carrying our burdens), then this idea is a very inexpensive way to go about it.

The plan isn’t perfect. However, as a cheaper, fee-free solution that lowers costs to businesses, I think it would be a pretty good start.

However, given that it is a plan that would probably affect almost every vested superannuation interest, it would be fought, tooth and nail – which probably means I’m on the right track.

Scott Phillips is the Motley Fool’s chief investment officer.

Most Viewed in Money

Loading

About admin

Check Also

Alexander Vindman retires from US Army, alleges ‘bullying’ by Trump

Washington: Former White House aide Alexander Vindman, a key figure in the impeachment of President …