The secret to a confident retirement - and the cost of pausing investment contributions

Retirement should be a time to put your feet up, enjoy old hobbies, try out new ones and generally relax. But it can also bring new worries, especially around money.

It’s easy to assume that high income earners would feel a lot more optimistic about retirement than those on modest incomes. However, that’s not always the case. A new study by Vanguard[1] found that forward planning, more than income or age, is the factor that shapes our confidence about retirement.

The report says Australians generally take one of two paths to retirement – either planning ahead, or not making much in the way of plans at all.

What do the ‘planners’ do that drives a sense of confidence? It’s surprisingly simple. They take action to prepare. They prioritise savings, they set budgets, and they look on superannuation – rather than the age pension – as the biggest part of their retirement plan. One in three of these planners make regular contributions to their super, and over half have a good idea of what they need to do during their working lives to afford the retirement lifestyle they want.

It all sounds easy – and it is. But less than one in three Australians fit into the highly confident category.

Changing work patterns call for a fresh approach

Of course, there’s nothing new about the value of planning for retirement. What is new is the way our working lives are evolving.

Many Australians expect to take an extended break from work sometime between their 20s and 50s. One in two people under 35 anticipate taking parental leave.  Others plan study leave, or just a long stretch out of the workforce to travel. These sorts of career breaks often didn’t feature in the working lives of today’s retirees.

As Vanguard warns, the next generation of retirees will need to allow for the financial impact of extended career breaks, particularly in regard to their super balances and other long term retirement savings.

The reality though is that preparing for retirement is something many people leave on the backburner for much of their working life. Then, by age 50 the reality of looming retirement sets in, and the race is on the build super and other investments as quickly as possible.  

Taking a more gradual approach pays off. And it’s not just about super.  Building a portfolio of investments throughout our lives can also be a confidence booster in retirement. It provides a source of passive income, which in the case of dividends, can be lightly taxed.

Retirement can bring an income reality check

The main point is that the income you’re likely to live on in retirement hinges largely on the steps you take while you’re in the workforce. It’s a straightforward concept, yet there is often a massive disconnect between the income people want to have in retirement, and the income they’re likely to live on based on their super savings.

Vanguard found working-age Australians say, on average, they’d like to have income in retirement of $99,000 annually. Some will achieve this. But with the median super balance of today’s 60-64-year-olds sitting at $181,000 for men and $139,000 for women, it’s clear that plenty won’t. This highlights the value of steadily growing investments – and not just relying on employer super contributions, throughout our working lives. 

The cost of pausing investment contributions

I know that plenty of Australians are doing it tough right now managing skyrocketing home loan repayments and other cost of living pressures.  There’s a lot of belt tightening going on, and in cutting back discretionary spending it can be tempting to shelve or pause regular investment or super contributions. It’s a step to consider carefully because it can just mean deferring the pain.

The money you contribute to super or other investments benefits from the power of compounding. If you stop those contributions entirely, the value of your investments isn’t just affected by the loss of the money paid in. You also dilute the snowballing effect of compounding. Even if you plan to make up for the payments in the future, you can’t claw back lost time for compounding.

Long story short, reducing the amount you invest, or stopping altogether, may make it easier to meet short term needs. However, it could significantly impact your standard of living later in life, when you have fewer other options open to you, and that can seriously dent your retirement confidence and lifestyle.

It's never too early to get on top of your retirement planning. Check out InvestSMART's retirement calculator and guide to investing in retirement. Additionally, the InvestSMART Professionally Managed Accounts have automated contribution and income settings to help save for retirement and fund your lifestyle in retirement. Use the chat in the bottom-right to ask the team for more information.