- 19 January, 2016
This year, I resolve to double my superannuation in five years
Yes it is that time again, when we all make a commitment to lose weight, get fit, drink less, quit smoking, stress less or maybe just enjoy life more.
According to research and articles which I have read, approximately 70% of us are able keep the resolution in the first two weeks, I have no idea what happens to the other 30%. By six months this figure has fallen to less than 50% and drops again to under 20% by year’s end. Obviously we are not all that good at commitment.
This year I turn 60, so my resolutions from previous years have changed a little. Even though I may not see myself as getting older and about to enter the next phase of my life, retirement, it is issue I would be foolish to ignore.
My good friend PK has written on a number of occasions about the financial requirements of retirement and how much you need to have in superannuation to achieve a comfortable retirement or a modest retirement. I do not have enough to live a modest lifestyle let alone the comfortable lifestyle.
So my New Year resolution this year is a target, which I think is always important when you commit to a change in your lifestyle. My target is to double the monies I have in superannuation in five years.
If I were to do nothing, according to the rule of 72*, I would require a compounding annual interest rate of 14.4% to achieve my target. The likelihood of this occurring is virtually zero
So what is my plan?
As I am over the age of 50 I am able to make yearly concessional contributions up to $35,000.
What are concessional contributions? As an employee these are the superannuation guarantee contributions made by my employer plus those amounts I choose to salary sacrifice to superannuation. In very simple terms, contributions made prior to tax being deducted at my marginal tax rate. Sure tax is paid by the superannuation fund, but this would be at a rate of 15%, which is less than my marginal tax rate.
The next step in my plan is to also make non-concessional contributions. Contributions on which I have already paid tax. The non-concessional contributions cap is $180,000 per annum, an amount I can only dream about. So yes, I will be making non-concessional contributions in addition to the concessional contributions.
The most important step in my plan was to ensure I spoke to someone who could explain the complexities associated with concessional and non-concessional contributions, because if I contribute too much there are tax penalties and if I contribute too little I do not achieve my target.
This person also acts as my coach ensuring I remain committed to my target and do not look for excuses to deviate from the master plan.
I believe for any New Year resolution to succeed they need to be specific, target driven and supervised by someone who will hold you accountable when you step away from the path that is required to be followed.
Being vague about what you what to achieve, whether it be weight loss, fitness or financial, leaves you with too much space to fall short or to just step away from the original commitment.
The other very important rule is to make the target realistic and to take into account other issues in your life, do not make the resolutions so all-consuming that it contributes to an increasing level of stress in your life.
Good luck and all the very best for 2016 may it be all you hope for.
*Rule of 72 – divide the number 72 by the interest rate you are currently receiving to provide you with the number of years it will take to double your money or vice versa divide 72 by the number of years you would like to double your money to show the interest rate you need to obtain.
The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here