Children are costing parents their retirement savings

Children are costing parents their retirement savings

It’s well known that it costs money to raise children but it’s not just the expected costs of feeding, educating and dressing kids that’s denting parents’ wallets – Australians’ retirement savings accounts could be taking a hit, too.

Raising children affects retirement plans

Career breaks to raise children are the biggest barrier to having adequate retirement savings, according to MLC’s Quarterly Wealth Sentiment Survey for the June quarter.

The figures certainly jumped out — this specific retirement savings barrier bounced upwards by a huge 70 percent to take out its number one place.

Of the 2,000 individuals surveyed, 38 percent expect to face a financial shortfall when entering retirement. That’s more than one in three Australians that will be left with savings accounts with balances that won’t support retirement, which is a staggering proportion of the population.

The results are not equal

Perhaps unsurprisingly, a higher proportion of women than men ranked a career break as their single greatest barrier to impacting their retirement savings account figures. 

A career break was the most significant barrier to having sufficient retirement saving for women, while men rated this as the third-most significant barrier.

However, it’s essential for all parents to consider their super plans or SMSFs.

“Families, and particularly women, concerned about the impact career breaks will have on their retirement savings should plan ahead as there are strategies that can minimise this financial shortfall,” said Lara Bourguignon, National Australia Bank Wealth General Manager of Client Management.

It appears that saving sooner, rather than later, could be the key to the puzzle that is retirement planning.

That said, some Australians have not taken this approach. According to the MLC survey, around one-quarter of women more than five years from retiring are not investing at all. Yet surprising, women tend to worry about investments and superannuation more than men do.

How far do Australians need to go?

Between June 2012 and July 2013, there were 4.7 million people in the workforce aged 45 years or older, according the Australian Bureau of Statistics. 

Of these people, 79 percent (3.7 million) said they plan to retire from the labour force in the future. On average, men intend to retire at 63.8 years, while women intend to do so at 63 years.

Almost half (49 percent) of those over 45 years who said they intend to retire in the future expect their SMSF or superannuation fund to be their main source of income. This suggests that a significant proportion of Australians look elsewhere to fund their retirement.

With the cost of raising children, making home loan repayments, paying bills and squeezing in the odd holiday stacking up, planning for retirement sooner rather than later is the way to go. 

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Learn more about savings accounts

How to open a savings account for my child?

Some banks and financial institutions allow parents to open a bank account for their child as soon as it is born, and start depositing funds to go towards the child’s future.

Children’s savings accounts generally don’t have fees, and are structured to help develop positive financial habits by limiting withdrawals, encouraging regular deposits, and earning interest on the savings, similarly to standard savings accounts.

Can you set up a savings account online?

Yes. Several large and small banks offer online applications for savings accounts, and there are also online-only financial institutions to consider.

Online-only savings accounts are often less expensive than other savings accounts, though they may not offer the same flexibility, features, or face-to-face service as more traditional savings accounts.

Can you have a joint savings account?

Yes. Joint savings accounts can be useful for two or more people wanting to combine their savings to meet shared financial goals, including spouses, flatmates and business partners.

Some joint savings accounts require all parties to sign before they can access the money. While less convenient, this extra security can help encourage all parties to meet their shared financial goals.

Other joint savings accounts allow any of the account holders to access the money. These accounts can be convenient for financially responsible couples that trust one another implicitly. 

How to make money with a savings account?

Savings accounts make you money by earning interest on your savings. The more money you deposit, the longer you leave it in the account, and the higher the account’s interest rate, the more interest you’ll be paid by the bank or financial institution, and the more your wealth will grow.

To make sure your savings account makes money and doesn’t lose money, it’s important to maintain a large enough minimum balance that the annual interest earned exceeds any annual fees charged on the account.

Can you set up direct debits from a savings account?

It’s not usually possible to set up a direct debit from your savings account to cover ongoing expenses or bills, as savings accounts are structured around growing your wealth by earning interest on regular deposits, and discouraging withdrawals.

Some transaction accounts allow you to set up direct debits and also earn interest, though you may not enjoy as much flexibility as a dedicated transaction account, or get as high an interest rate as a dedicated savings account.

How much money should I have in my savings account?

A good rule of thumb when working out a minimum balance for your savings account is to make sure that you’ll earn more in annual interest on your savings than what you’ll be charged in annual fees.

If you’re saving with a specific goal in mind, prepare a budget so the interest you earn on your deposits will help you efficiently reach this goal. Online financial calculators may be helpful here.

What is a savings account?

A savings account is a type of bank account in which you earn interest on the money you deposit. This makes it one of the easiest and safest investment tools.

What is the interest rate on savings accounts?

As banks frequently change their rates, the most accurate way to look at interest rates on savings accounts is to use a savings accounts comparison tool. When you look at the savings rate check what the maximum and minimum rates are. Often banks will offer you a promotional rate for the first few months which is competitive, but then revert back to a base rate which can sometimes be less than inflation. Ongoing bonus rates are often a safer bet as they will keep rewarding you with the maximum rate, provided you meet their criteria

What is a good interest rate for a savings account?

A good rule of thumb to keep in mind with savings accounts is to look for a rate that is higher than the CPI inflation rate. This number is constantly changing, so check the Reserve Bank of Australia’s page. If you aren’t earning interest above this then the value of your money will go backwards over time.

Who has the highest interest rates for savings accounts?

As banks frequently change their rates, the most accurate way to know who currently has the highest interest rate is to use a savings account comparison tool.

How does interest work on savings accounts?

The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

Can you direct deposit to a savings account?

Yes. You can make one off payments or set up regular direct deposits into a savings account. This can be organised easily through online banking or by making deposits in a branch. Talk to your lender to find out the easiest way for you to set up direct deposits.

Can I overdraft my savings account?

A lot of savings accounts won’t let you overdraw. Some will allow this feature but you’ll need to apply first. It’s best to read the fine print and check with your lender whether this is a feature they offer. It can be a helpful addition, but as your lender can charge you a fee as well as interest for going into negative numbers, it’s best to avoid overdrafting when possible.

How do I open a savings account?

Opening a savings account is a relatively simple process. If you’ve found an account with a suitable interest rate, you’ll just need to get in contact with your chosen lender via a branch, phone call or hop online to begin the process. 

You may be required to provide:

  • Personal details, including identification (driver’s license, passport etc.)
  • Tax file number
  • Employment details