You don’t need to make drastic changes in order to get big results in the future. But people often think they do, and so they change nothing, instead – resulting in zero gain. Today we’ll look at the difference 1% can make to your retirement.
1% doesn’t seem like much, but it can make a significant difference over time. In this scenario, we want to try and increase your return by 1%. We know that past rates of return are not an indicator of future returns, but it’s a general rule of thumb we can refer to.
We’ve heard of cases where clients are guaranteed a 15% or 20% rate of return for the year. Nobody can guarantee this – and if someone is offering a return that you think sounds too good to be true, it’s probably because it is.
What we want to do is different. We want to try and get from 7% to 8% when it comes to your return. Also, putting an additional 1% of your net pay into your super can make a huge difference.
Example
A couple aged 50 have a combined income of $150,000 before tax, with 10% going into their super fund from their employer. At the moment, they have a combined super balance of half a million dollars.
We’re comparing this couple to a ‘control group’ that achieves a 7% net rate of return on their super and are making no voluntary contributions.
So instead of getting a 7% net rate of return, the couple are getting an 8% rate of return. On top of that they put in an additional 1% of their salary into their super, which equals $1,500 a year. After a 15-year time frame the couple (now 65) would retire with an extra $273,000 in retirement savings. This extra return of 1% and the 1% extra contribution makes a huge difference thanks to compound interest.
We use this example to show that a small amount can make a huge difference. And we often find with our clients that the 1% of salary is easy to find and to put away, no matter what their salary is. But a lot of people think ‘I don’t have $30,000 to put into my super – I won’t make a difference, so what’s the point?’ We’re here to say that that is just not true. You only need to take small steps to get a great outcome over a long-term period.