How to become a millionaire

Realise your Dream 

The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here 

There always seems to be something magical about $1 million…and being a millionaire!

But why is this so?

For many, the idea of having a cool $1 million has connotations of financial security and freedom, the ability to do what we want, when we want. And $1 million is the magical retirement nest egg that many people aspire to.

Having $1 million in super at retirement age probably means that (along with other assets a person acquires over a lifetime) access to the Government provided age pension is probably unlikely, but it will still allow most people to enjoy a reasonably comfortable retirement lifestyle.

So, what do we have to do to have $1 million by retirement?

The answer is to start saving and ideally, start saving as early as possible.

One of the problems being faced by many Australians is that we think that by having our employer contribute to superannuation on our behalf (under the superannuation guarantee system), all our financial needs for retirement will be met. Sadly, nothing could be further from the truth.

The amount an employer is required to contribute under the superannuation guarantee scheme is currently 9.5% of your salary. This is scheduled to progressively increase to 12% by 2025. However, to be able to have some ambitious retirement plans, the contribution rate probably needs to be in the vicinity of 18%, for an entire working life. Now, that would make a huge difference!

Clearly the responsibility to save falls back on each one of us as individuals, if we want to enjoy the type of retirement lifestyle we dream of.

I was recently looking at some information produced by Morningstar, an investment research house. They looked at how much a person, at different ages, would need to save each month in order to have $1 million by age 65. For the purposes of the exercise, they assumed that the savings were invested and earned a return of 7% each year.

 It is apparent from this table that the earlier we start saving, the less we have to save. A 25 year old needs to save just over $90 each week in order to have $1 million by the time they turn 65.

However if we don’t start saving for our magical $1 million retirement nest-egg until we are 45, the amount we need to save each month increases quite significantly to almost $2,000 per month, a figure that is beyond the reach of most of us.

But don’t despair…saving something extra on a regular basis will help to bridge the gap.

There are a number of strategies that can be used to save for retirement, including entering into a salary sacrifice arrangement with our employer whereby we forego an agreed part of our salary and have it contributed as additional superannuation contributions.

A carefully crafted financial plan and disciplined approach to savings is essential for each one of us if we are to achieve our financial goals!