The amount many Australians have saved for retirement, compared to what they will need, is nothing short of shocking. That's why you should consider acting now and be ready to buy good quality ASX shares, like Macquarie Group Ltd (ASX: MQG), National Australia Bank Ltd. (ASX: NAB), TPG Telecom Ltd (ASX: TPM), Wesfarmers Ltd (ASX: WES) and Class Ltd (ASX: CL1), when they are sold off.
How much do I need?
According to a report by REST Super, a single person looking for a 'comfortable lifestyle' in retirement, which includes spending $224 per week on 'leisure' and $120 on food (which, let's be honest, is a fairly conservative amount in itself) you would need $42,861 per year in retirement. That was using 2015 figures from ASFA.
For a couple, you need even more. It means you need some $58,784 per year to live comfortably.
Reverse engineering that figure, a term deposit at Commonwealth Bank of Australia (ASX: CBA) is currently paying 2.35% (before tax and inflation) for 12 months. That means, to get $58,784 in annual income a couple needs $2.5 million!
I don't know many people who have $2.5 million saved for retirement.
"Use the force"… of the sharemarket — Obi-Wan Kenobi
Now that we are done realising we probably don't have enough to 'live comfortably', let's get real for a moment.
Let's imagine we are a 40-year-old named, Reginald:
- With $0 in retirement savings
- Who can make a deposit of $200 each week
- Is looking to retire at 65
- And wants $35,000 in annual retirement income
For this example, we'll assume a 9% pre-retirement annual return from Reginald's savings (more on this below). In retirement, his money makes 2.35%.
Here's what the graph looks like:
As you can see, the graph shows that retirement will be funded (at $35,000 per year) until Reginald is in his mid-90's.
Now, let's assume Reginald didn't put his money to work at 9% and chose instead to make a petty 2.35% annual return on his retirement savings until age 65.
Here's the graph:
As you can see from the grey-shaded part of the chart, retirement is funded until 74 — just under 10 full years.
A 9% per year return
Since 1970, despite wars, terrorism, sharemarket crashes and Donald Trump's hair, the Australian share market has returned an average of 10.6% per year, according to Vanguard.
There's no guarantee the next 47 years will be same, but I'd be willing to bet my retirement savings on shares providing a better return than term deposits and savings accounts, despite the odd-spot of volatility and the occasional heartache.
Shares for retirement
You have a couple of options for gaining access to the sharemarket. You could buy into an actively managed or index fund, and let someone else do it for you — for a fee, of course. Alternatively, you could buy shares that you hand-pick yourself, or open a brokerage account and follow the picks of the experts (see the link below this article).
If you are game enough to pick your own shares, here are five ideas to get you started:
Macquarie
Macquarie is Australia's largest investment bank, doing everything from stock research to aeroplane finance. The $30 billion bank is forecast to pay a dividend equivalent to a yield of 4.4% in the year ahead.
NAB
NAB shares are a little expensive at today's prices, in my opinion. However, if shares in the bank drop a few dollars, they could provide decent growth and dividend income.
Wesfarmers
Like NAB, I'd love to buy Wesfarmers shares for their defensive income and modest growth potential — but at a lower price. Wesfarmers is the owner of names like Kmart, Coles, Target, Bunnings Warehouse and more.
TPG Telecom
TPG is the owner of the popular budget broadband provider. It also owns iiNet. TPG is pushing into the mobiles market and expanding into Singapore. Its dividend is smaller than other ASX shares, but it offers growth potential.
Class
Class is a small company, but I think it should be considered by those with a long-term investment horizon (5+ years). Class is a software business that develops products used by accountants and financial advisors to manage client superannuation funds.
Foolish Takeaway
Some of the figures on retirement are downright shocking.
But rest assured there are always things you can do to improve your lifestyle in retirement. The strategy I outlined above assumes a person (Reginald) has time to invest his money. But even if you have five years until you plan to retire, there are investments and tax structures available to help you grow your nest egg.
