We can no longer rely on the government to hand out an old aged
pension cheque to us once we retire. We cannot take for granted
that at the end of our working life we will be taken care of
financially.
Our population is ageing, due to the baby boomer generation, and
within 30 years there will be so many retired people, compared
to the number of working age people, that it will be
economically impossible for the government to afford to provide
any reasonable source of monetary assistance for the elderly.
The government has realised this, and that is why they
introduced the compulsory employer paid superannuation scheme
and are even now beginning to give financial incentives to
Self-funded retirees.
Most of us have never sat down and even considered the
ramifications of why the compulsory super was introduced and for
many of us it is a matter of too little too late. Even for the
young women in our society – who have a full working life
ahead of them, they still cannot rest assured of a comfortable
retirement.
Why is this? It is because that unfortunately even with
contributions at the current level of less than 10%, someone on
an average wage who works continually for 30 years, is still
going to find themselves trying to survive on an income
equivalent to less than $20,000,00 per annum in today’s
dollars.
You will notice that I said continually working for 30 years.
This is another reason why women are particularly disadvantaged,
firstly because they often have to take up to ten years leave
from the workforce to raise children, secondly because women in
general earn less than their male counterparts and thirdly
because an enormous proportion of the women in Australia, will
never have received any previous superannuation contributions,
prior to the compulsory superannuation being introduced, and
will therefore not have had contributions made over their entire
working life so far, giving them even less to fall back on by
the time they retire.
Many women may previously not have thought of lack of
superannuation contributions as being a problem, as their
husbands may have been contributing to super since they first
began work. Unfortunately though with the high number of
divorces in this country, it is unwise to rely on the fact that
your partner’s superannuation will be there for you in
your retirement years and even if a large proportion is awarded
in a settlement – that it will be sufficient to sustain a
comfortable retirement for any length of time.
All of these factors are why women now more than ever, need to
begin taking action to build up a source of ongoing income, that
will grow to such an extent, as to be able to provide a secure
and happy future for themselves and their children.
It needs to be a source of income that is unrelated to physical
work…that is an income that is generated from income
producing assets – and not from our personal efforts. One
of the best sources of creating this ongoing income stream is to
begin building an investment portfolio property, also aptly
paraphrases as bricks and mortar.
We need to start collecting income producing assets now, so that
they will have time to grow and develop so that we will be
financially independent for our retirement years.
Property is one of the best types of income producing assets,
mainly because through gearing, which is borrowing other peoples
money to supplement our own, we are able to control assets of a
far greater value, and benefit from the growth on the overall
value, including the borrowed portion, in contrast to only
benefiting from the growth on the small portion of our own money
contributed.
For example, if you have $10,000.00 invested at 7% compounding,
then in ten years it will grow to around $20,000.00. If on the
other hand you have used that $10,000.00 as 5% deposit on a
$200,000.00 property, which grows in value by 7% per year, then
after ten years the property would have grown in value to nearly
$400,000.00 giving you a profit of almost $190,000.00 instead of
a profit of $10,000.00 had you just invested your own money.
After 30 years your money alone would have grown to just over
$76,000.00 and the geared property would have grown to more than
$1.5 million.
This example of course has not taken into account the initial
purchasing costs involved to secure the investment property, nor
has it taken into account the rental income that you would also
be receiving….I have simply used it to demonstrate that
the more assets that you can get working for you, the better off
you will be.
Furthermore, if you already have equity built up in your own
home, it is possible to purchase an income producing property,
without even having to outlay any cash whatsoever.
I will discuss this in further detail shortly, but first I would
like to explain to you the miracle of compounding interest
– because this is the major factor that allows an average
person to create a source of immense wealth. It is a little
understood concept that can have a huge bearing on your future,
once you understand how it can best be utilised.
Compounding is the effect of letting something grow, and then
rather than taking away the newly created amount, you leave the
whole thing in tact, and allow further growth to take place on
the entire amount, and so on. Effectively making it grow
exponentially.
For example. If you have $1,000.00 that is growing by 10% per
year due to interest received. Then you have two options, you
can withdraw the income of $100.00 that has been generated, or
you can leave it where it is, and allow it to compound (earn
interest on interest),
If you allow it to compound, then in the second year you will
get an income of 10% of $1100.00, which is $110.00, instead of
$100.00. This may not sound like much, but the longer you leave
the money to compound, the larger it will grow. As each year
passes it will grow by a larger amount, in fact after 10 years
it will be worth $2,593.75 and after 40 years it would be worth
a massive $45,259.42. Remember that if you had withdrawn the
$100.00 interest each year for the same period 40 years –
then you would have received only $4,000.00 and would still have
the original $1000.00, being a total of only $5,000.00. This
means that by letting it compound you would have earned more
than an additional $40,000.00.
One of easiest ways to calculate how compounding interest works
with different rates of return is to become familiar with the
Rule of 72.
This rule states that “The number of years that it will
take for your money to double is 72 divided by the interest
(growth) rate”.
Therefore if you have $1,000.00 invested at 10% interest, then
the number of years that it will take for your money to double
to $2,000.00 is 7.2.
72 divided by 10 = 7.2
If your money is invested at 7% interest, then it will take
approximately ten years to double in value. If it is invested at
5% it will double in just over fourteen years.
The two most important aspects of compounding are one: rate and
two: time.
The higher the rate and the longer the time something is left to
compound, the greater the final result will be.
This is why the sooner we start investing, the better.
Visit the authors website at
http://members.optushome.com.au/dlohrere/
About the author:
Debra has spent several years researching the powerful medium of
property investment and speaking with hundreds of other property
investors. She has discovered many different strategies that
have been used and the ones that have worked best. She now
writes books and articles about property investment, goal
setting, budgeting and how to create financial security for
retirement
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