The Australian Age Pension is among the most generous in the world for retirees and helps cover essentials that have become increasingly expensive.
At the time of writing, the maximum Age Pension that a single Australian person can receive is $1,237.70 per fortnight. That works out to an annualised rate of approximately $32,180.
That's a very useful amount, but retirees may want to receive more. I'm going to show how the price of just a daily coffee can make a huge difference over the long term.
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Saving
It's a bit of a cliché that saving a small amount each day from a particular purchase could make a big difference financially by the time we reach retirement.
With enough time, saving a small amount each day can make a big difference. It's completely fair for people to spend their money how they want to, but let's look at how much that money could grow if it were invested instead.
My local café charges $7 for a good-sized coffee. A daily coffee at that price translates into $49 per week and $2,555 per year.
If someone directed that money towards investing instead, it could grow into a large amount by retirement.
Investing the daily coffee money
Over the ultra-long term, the global share market has returned around 10% per year.
Returns of 10% per year are a powerful force for compounding our wealth. $100 doubles to more than $200 in less than eight years. It'd double again in another eight years. And then another doubling in another eight years.
Of course, past performance is not a guarantee of future performance – future returns are not guaranteed to be 10% per year.
So, let's imagine that someone invests that daily coffee amount into the share market, whether that's something like Vanguard MSCI Index International Shares ETF (ASX: VGS) or VanEck MSCI International Quality ETF (ASX: QUAL).
After 10 years, it'd become $40,720.
After 20 years, it would reach $146,338.
After 30 years, it would become $420,282.
After 40 years, it becomes $1.13 million.
After 45 years, it'd be worth $1.84 million.
If someone is 20 and puts the potential daily coffee money into the share market, they'd have 45 years before reaching 65, and that could reach $1.84 million, depending on share market returns.
Doubling the current Age Pension translates into an annual goal of $64,360. To generate that from a $1.84 million portfolio, we're talking about needing a dividend yield of just 3.5%, which is very achievable from diversified Australian-based investments with franking credits attached to the dividends, such as Vanguard Australian Shares Index ETF (ASX: VAS) or Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
I'd also encourage investors to put more money towards their retirement than just avoiding a daily coffee to help offset future inflation.
Overall, I think the future looks very positive for a young Australian who invests $2,500 per year towards the share market.
