Planning for the future

COMPOUNDING: Compound interest is the key to investment growth.
COMPOUNDING: Compound interest is the key to investment growth.

Welcome to 2020! Today I am going to spare you the usual stuff about getting your affairs in order and making and keeping New Year's resolutions. Instead, I'm going to invite you to play some computer games to enhance your financial literacy.

Start by heading to www.noelwhittaker.com.au and hitting the Calculator tab. There you will find a bevy of useful calculators that should stand you in good stead for the rest of your life.

Let's begin with the Compound Interest Calculator. Understanding how compounding works is essential if you are going to create wealth. The basic principle is that the size of your hoard depends mainly on the rate you can achieve and the time the money is invested.

Let's take a hypothetical starting investment of $1000, then add a further investment of $1000 a month - that is $12,000 a year. Key in an estimated rate of return on your portfolio of 4%.

Hit the calculate button and you'll discover that in 20 years your portfolio should be worth almost $360,000.

Pretty sweet?! Now change the rate to 9% and see that in 20 years you would have nearly $620,000.

Now run the numbers again to see the dramatic effect of time: after 35 years at 4% you should have around $888,000, but at 9%, $2.6 million.

The next step is to go to the Superannuation Contributions Calculator.

Here you can enter your current superannuation situation and predict your retirement balance for various game scenarios.

Here's an example: let's assume your superannuation balance is $250,000, your salary is $95,000 per annum and your salary increases by 4% per annum.

Start with a rate of return at 5%, which is about what the dud funds have been producing.

The calculator can project your superannuation balance for the next 50 years but let's just use 30 years today. At 5% per annum your superannuation balance will be just under $2 million.

Now change the rate to 9.5%, which is what the better funds have averaged over the last decade, and notice the projected balance in 30 years of $5.6 million.

Surely that's a wake-up call to take stock of which fund has your superannuation right now and make adjustments as necessary.

If you are planning retirement, my Retirement Drawdown Calculator is a must. Simply enter your estimated retirement balance, the rate of return you estimate you can achieve, and your annual drawings.

The calculator will immediately show your balance as the years pass.

If you don't like the figures, play with the variables to create a better scenario, then figure out how to make that work in real life.

If you are considering investing in shares, my Stock Market Calculator is for you. It lets you enter a notional sum at a date of your choosing, and then tells you what your portfolio would be worth if you had invested that sum in an Index Fund that matched the All Ordinaries Accumulation Index, which includes both income and growth.

It can also provide vital information in choosing between property and share investments. A great way to start is to enter the value of an investment property you own.

For example, in January 2003 I bought an investment unit for $216,000; it's now worth $400,000.

That sounds like a fantastic return - until you enter $216,000 invested in January 2003 as your initial investment and discover that the same money in an index fund would now be worth $1.04 million.

My website offers many other calculators. Today's article is just a taste of the kind of examples you can run for yourself, to make sure you're doing whatever is necessary to stay on track for a successful and prosperous retirement.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au
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