What’s a comfortable retirement income in Australia, and how much super do Australians need to achieve it? It depends on who you ask. As we approach retirement, many Australians start questioning whether their superannuation balance is adequate. Perhaps we need to save some more? So retirement in Australia – how much super do we need?
A commonly cited figure is A$1.6 million, but that is not an easy target for many people to achieve. Some experts say such a sum could result in them saving more than they need for retirement. Ultimately, there is no correct figure for all. There are three factors that determine how much in retirement savings a person needs. The first is sources of income – superannuation, non-super savings and the age pension; second is the lifestyle you want to lead in retirement; and thirdly, your expected lifespan, which is “the real big unknown”.
Superannuation is designed to last 20 to 22 years and, on average, about 50 per cent of retirees will need their superannuation to last longer, in some cases much longer. Experts believe the A$1.6 million figure is an attempt to address this longevity risk. Additionally, a A$1.6 million individual superannuation balance is the level above which many of the superannuation tax concessions cut out, which may be another reason this figure is so often cited. Research suggests that someone with A$500,000 in super would run out of money, but A$1.6 million is probably enough. The magic number is probably somewhere in between.
Nonetheless, Australians’ super balances mostly fall well short of even half a million dollars. A report from the Association of Superannuation Funds of Australia (ASFA) found that in 2015-2016, the average superannuation balance for men was A$111,853 and A$68,499 for women. The balances for those nearing retirement were better, but still short. For people aged 60 to 64 years, the average balance was A$270,710 for men and A$157,050 for women.
A modest lifestyle in retirement
ASFA sets a benchmark retirement income known as the ASFA Retirement Standard. For a “modest” retirement lifestyle – better than the age pension, but still only able to afford fairly basic activities – an annual income of A$27,648 is required for a single person and A$39,755 for a couple, recommends ASFA. ASFA defines a “comfortable” retirement lifestyle as enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasional international holiday travel. This requires an income of A$43,317 for a single person and A$60,977 for a couple. All calculations assume that the retirees own their own home.
Some believe, however, that aspiring to the ASFA modest retirement standard is not the answer. To make Australia a better society, we need to ask what are the policies and what can we do to assist people to a more comfortable way of life in retirement. That’s where we need a high [superannuation] contribution rate and we need people to put more money away, particularly if we’re going to have a lower-return world in years to come.
To achieve a comfortable retirement income by the ASFA standard, a couple would need a combined superannuation balance of a little over A$800,000. A couple who retired at age 66 with this super balance could be 95 per cent certain that their funds would last for the next 30 years. While this figure won’t apply to everyone, it is a good guide. The calculation assumes that when the couple retires they receive a very small age pension, but as they run down their superannuation balance over the subsequent years, their pension entitlement grows.
Scrimp and save in order to retire?
On the contrary, many people don’t want to run down their retirement balance and so lead a more frugal life than is necessary. Once these people do retire, they have a tendency to be very conservative with their spending. They often will anchor to whatever balance they had when they retired. If a couple was accustomed to living on a combined salary of A$150,000 or A$200,000, [an annual budget of] A$60,000 may not really be the retirement they were hoping for.
The savings targets can also rise quickly if people want a higher retirement income, because the pension cuts out completely once a home-owning couple has assets above A$853,000, excluding the value of their home. Thus a couple wanting an annual income of A$80,000 that would last for a 30-year period with 80 per cent certainty would need about A$1.6 million.
Some argue the current superannuation system, with a 9.5 per cent superannuation guarantee contribution – where an employer contributes the equivalent of 9.5 per cent of a person’s wage to their superannuation account – and the age pension, should be enough for people to have an adequate retirement income. By adequate, they mean a retirement income that gives them the same living standard in retirement as they had during working age. For instance, if you’re earning A$150,000 a year or A$120,000 a year before you retire, then you might need A$70,000 or A$80,000 in retirement. But if you were earning A$50,000 beforehand, then you probably need A$35,000 to A$40,000 in retirement. ASFA’s guides take a one-size-fits-all approach, which is not always the case.
As superannuation balances grow, one thing is certain: there will be continuing debate on how much Australians need to save for their retirement.
The material and contents provided in this publication were sourced by our friends at InTheBlack and are informative in nature only. It is not intended to be advice and you should not act specifically on the basis of this information alone.
DGL Accountants aren’t just your average superannuation advisers and auditors – we are partners on the journey, and we’re ready to go the extra mile with you!
To discuss your superannuation requirements or if you would like further information regarding self-managed super please contact the Team at DGL Accountants.