Money matters have a way of bringing out everyone's voyeuristic streak. We all like to know where we stand relative to the herd. How much do you reckon that guy makes? Am I saving more or less than average? Am I ‘rich'?
The most important metric when it comes to your financial situation is your ‘net worth', which is calculated by taking the value of all your assets and deducting all your debts.
It's surprisingly difficult to pin down whether you're on track with regards to your net worth and there's a lot of grey area around how we should even define what ‘on track' actually means.
Let's assume you're fresh out of university at 22 and begin full-time employment. According to the Australian Bureau of Statistics, the average full-time weekly wage is $1,592, or around $83,000 a year.
We'll apply a discount to that at the beginning of your career and assume you start out at $50,000.
Refreshingly, youngsters aged 25 to 34 are actually above average savers, putting away $533 a month for a 10% average savings rate. This is a realistic target; for those in the top 20% of income earners, you need to put away 20% or more to be considered above average.
The 30-year average return for Aussie stocks is around 9%, but, for the sake of simplicity, we will deal with ‘real' returns of 6% after adjusting for inflation.
So let's crunch some numbers. If you leave university at 22, get your $50,000-80,000 a year job and start putting aside $533 a month (roughly $6400 a year) – then invest it at a 6% real rate of return – you would have accumulated around $73,000 by the time you hit 30.
Thanks to compound interest, money invested in your early years has a disproportionate effect on your living standard in later years – so the more you have put aside in your 20's, the better.
Now let's go a bit further. As a 30-year-old, let's assume you're now earning the average Australian full-time wage of $83,000. Saving may soon be more difficult, though. A recent discussion paper by the Reserve Bank found that there was a dip in savings for those aged 35 to 45, because younger people might be saving for a deposit on a home, while middle-aged families might be paying mortgage interest (as well as having other expenses like children). We'll assume an 8% rate of saving – still invested at 6% – which would take you to around $218,000 by the time you're 40.
The average savings rate then picks up again in later years, hitting a peak of around 12% at age 50, so it's reasonable to target at least $9,000 a year towards the end of your career if you want to stay in that ‘above average' cohort. You would hit a net worth of around $500,000 at age 50, about $1m at 60, and $1.4m at 65.
As for how much you need to retire, there's no magic number. However, most financial advisors recommend a sustainable withdrawal rate of around 5%, so a nest egg of $1.4m would provide a yearly income of roughly $71,000, providing you with a lifestyle similar to your working years.
These are all back of the envelope calculations and your personal situation adds a lot of variability. You have to factor in things like student loans, superannuation, mortgages and inheritances. Higher incomes correlate with a higher rate of saving, so if you're earning more than $83,000, then 10–15% is more reasonable. For those in lower income brackets, the average savings rate is unfortunately negative. You can get a better idea of where you should be using your own set of assumptions and MoneySmart's compound interest calculator.
Only two out of every five Australians manage to save 10% or more of their gross salary, so 10% may seem like an ambitious figure. But it is achievable. If you're saving 20% or more, you deserve a spot in the ‘high achievers' list and the magic of compounding will richly reward you by the time you reach retirement.
These are just stats, so you can make your own conclusions about how you compare with others, although focusing on money probably isn't the best way to judge your accomplishments. Still, knowing where you stand relative to the herd can be empowering.
In the spirit of voyeurism and for everyone's benefit, we'd love to hear how our members are faring – do you remember what age you were when you hit your first $100k, $200k, $500k, $1m?