For many Australians, your 40s can be the busiest decade of your life. Kids, mortgage debt and growing work responsibilities all add up to leave little time for too much else.
But it’s also a decade that most workers need to make sure they take advantage of, financially speaking, to set themselves up for a good retirement. They can be make or break years, according to financial advisor Mark O’Flynn.
“I think it’s critical,” he told Yahoo Finance. “You really need to have a plan early in your 40s.”
He ocassionally has clients come to him as late are their early 60s, saying they want to retire in a couple years.
“And I think, you should have come here 20 years ago,” the Managing Director of Queensland-based Oxlade Financial said.
When it comes to investing and enjoying the benefits of compounding, the message is obvious: the early the better. Let as much time as possible do the heavy lifting.
“What people have previously done tells a story. The decisions they made in their 30s and 40s, for example, start to come to fruition down the line,” O’Flynn said.
“Decisions made in your 40s can significantly shape long-term wealth and retirement outcomes, particularly when compared to waiting until your 50s to get serious.”
For example, he said for clients wanting to “gear into property”, buying in your 50s probably doesn’t allow enough time to repay debt or have the property compound, especially if buying at the moment when asset prices are arguably already elevated.
Younger Aussies are having children later that previous generations. That means many millennials spend at least part of their thirties dealing with the expenses of child rearing, inclduing time out of the workforce and childcare costs.
“By late 50s we notice people are starting to and wanting to slow down – therefore it’s not naturally a time people where it is easy for people to accelerate,” O’Flynn said.
In your fifties, it’s also common for aging parents to all require care, which can also be expensive and time intensive, he added, referring to the phenomenon dubbed the ‘sandwich generation’.
Starting in your 40s can make a million dollar difference
O’Flynn largely deals with professionals, business owners and executives, or “ambitious working people” as he put it. So with that in mind, he outlined some quick math that shows how essential it is start investing for retirement before your 50s.
“Firstly, someone in their 50s that invests $10,000 a month for a period of 10 years invests a total of $1,200,000. However, the outcome at the end of that 10-year period is a projected investment balance of $1,730,848,” he explained.
By contrast, if that same person still invested a total of $1,200,000 but instead did so by investing half the amount per month – so a more managable $5,000 per month over a 20-year period starting from their 40s, then by the end of the 20-year period, the projected investment balance would be $2,604,633.
That’s assuming a rather conservative average return of 7 per cent per year, which is below the long-run return of equities markets.
The difference, thanks to nothing but extra time, is a cool $873,785.
How much do you really need to retire?
The Association of Superannuation Funds of Australia now estimates a single person needs a lump sum of $630,000 by age 67 to retire comfortably, while couples would need $730,000.
That is assuming people have their home paid off and also takes into account the pension system (wealth advisors are likely to recommend clients have much more).
That means a 40-year-old would need $117,700 in super today to reach that target if they are earning $90,000 a year, while a 50-year-old would need $262,200.
The latest ATO data showed the median balance for an Aussie in the 40 to 44 age group was $93,351, while for those in the 50 to 54 age group it was $147,857.
The gap was even wider for older Aussies approaching retirement, with those in the 60 to 64 age group having a median balance of $189,618. That’s compared to the $456,100 needed at age 60 to retire comfortably.
