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How much super is enough?

Okay, so you want a comfortable retirement, but do you have any idea of the savings required?

According to research from the University of New South Wales, to receive the equivalent of an average wage in retirement, approximately $85,000 p.a. before tax, you’ll need to save about 15 to 20 times that amount. That's $1.3 million to $1.7 million at today’s prices.

The Association of Superannuation Funds of Australia has also looked at this question. As opposed to total savings, they focus on income requirements for a ‘comfortable’ lifestyle, with their current estimates (June quarter 2019) being $43,601 p.a. for a single person and $61,522 for a couple. And if you accept their estimates, then you’d want to avoid relying on social security alone, with the age pension currently paying $24,081 p.a. for singles and $36,301 for couples.

What amount do I need to save?

Let’s say you are 59 and your partner is 57, and you both want to receive a ‘comfortable’ amount in retirement, which is about $61,500 p.a. after tax. At those ages, it could be expected that on average you will both live into your mid 80s or later. In addition, it is reasonable to assume that:

  • The income you and your partner receive will be indexed in line with the Consumer Price Index (CPI), say 3% per annum. This will be in line with inflation.
  • Any pension paid from your super fund is expected to last for your life expectancy and then paid to your partner for their life expectancy. This is increased by five years to consider the likelihood of you living longer.
  • The estimated level of income earned on your retirement savings is estimated as 7% per annum which is a long-term rate, net of tax.

While these assumptions may be considered unusual in the current economic environment of low inflation and low interest rates, we are considering a long-term horizon of 40 years or even longer.

If we use these assumptions, it is estimated that the total amount required in today’s money is slightly over $1.141 million.

How much do I need to contribute to meet that target?

Having estimated the amount required, we need to work out how it can be accumulated. Important considerations include: how determined you are to save for retirement; the benefit of compound interest and; the age you start saving. Let’s look at the difference if you started saving for retirement at 20 compared to 50.

By beginning at age 20 – and to accumulate about $1.141 million – the amount you need to contribute each year starts at about $3,367 p.a. If you begin saving at 50, the equivalent figure is $70,358 p.a.

The advantage of starting at age 20 compared to 50 can be illustrated in the two following tables. These show how much of the final amount accumulated in super will be made up of the contributions themselves and corresponding investment income. Starting at age 20 means a greater proportion of the final benefit will be investment income.

When will the money run out?

The hardest question to answer is ‘how long will your super last’, which can be influenced by many factors including unforeseen drawdowns, emergencies and market forces. For instance, you may need to withdraw an unexpected lump sum soon after retiring to pay for age care accommodation or other health needs. Or there be significant long-term changes to rates of return on investments, or inflation may nibble away on the value of your super.

It is possible that you or your partner may die earlier than expected, leaving your remaining super to your surviving spouse or other beneficiaries. The amount required to live on and the timing of the payments are not easy to predict.

Assuming a target savings amount of $1.141 million, let’s see how long the money would last for based on an expected drawdown of $61,500 p.a. indexed to CPI plus three additional variants:

  1. Long-term interest rate drops to 5% p.a., instead of an expected 7% p.a.
  2. A lump sum withdrawal of $550,000 is made in the 30th year after retiring
  3. A $120,000 lump sum is required in the 10th year after retiring

From this chart we can see that the quickest depletion is caused by a lower-than-expected earnings rate (5% p.a. instead of 7% p.a.), with a nil balance being reached by the 25th year post-retirement.

If $550,000 is drawn down in the 30th year, the amount in superannuation would run out in year 34.

And if $120,000 is withdrawn in year 10, the amount accumulated would last to the 35th year.

 

Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Firstlinks. This article is for general information purposes only and does not consider any individual’s investment objectives.

For more articles and papers from SuperConcepts, please click here.

 

11 Comments
tom
November 04, 2019

Until the May 2016 budget Australia had the best superannuation system in the world. If you had an SMSF and spent the time directly managing it and keeping abreast of the ever changing laws it rewarded you for not going on the public teat. We spent 30 years building an impressive nest egg. With a swipe of the pen we were told we had too much money and the super system was too generous. We immediately pulled the lot out paid no more tax and reinvested the money in our businesses. My adult sons having watched us for many years, had our advice about all governments left and right confirmed: they are not there to help you but rather to manage and milk you. 

Max Carling
November 07, 2019

Couldn't agree more

Jim Hennington
November 04, 2019

I am heartened to read the comments under this article.

The Actuaries Institute has been working on developing better principles for doing retirement modelling - to align the methods better with the key decisions and risks that retirees face.

A slide deck summary can be viewed here: https://actuaries.asn.au/Library/Events/FSF/2016/3aHenningtonLangtonRetirement.pdf

The charts demonste the range of outcomes that real retirees face under different strategies - and confirms all your concerns. Models must stress the full range properly and present results in a way that makes it easy to make informed decisions and trade-offs that properly account for risk. (My specialty)

Dudley
November 03, 2019

Looking on the downside, with: Inflation 3.0% / y, Living standard 1.0% / y, Yield -1.0% y and have, $1M at 100 y while withdrawing $61,500 / y in the first year would require $4M capital.

Nothing to indicate that a massive wipeout of capital will not occur over 30 to 50 years.

kieron
November 01, 2019

Thanks Graeme, this is something that greatly interests me as I approach my 50ies. However I feel there really needs to be more in depth analysis on this. The government must have done some to create the thresholds for the pension. There'll be a vast difference in the amount you'll need depending on whether you're a home owner or not as well as the value of the home (to meet land tax and maintenance requirements). Also the health and ambitions of retiree. Furthermore, there's no adjustment to include receiving the pension in the graph above. Once the assets fall below the threshold, aged pension will start to kick in to ease the rate of loss.

kieron
November 01, 2019

I want to see a real analysis done on this. There are so many variables that are too often just glossed over. Some simple ones are house ownership, health of retiree and ambitions of retiree. Furthermore, there's no adjustment to include receiving the pension in the graph above. Once the assets fall below the threshold, aged pension will start to kick in to ease the rate of loss. 

Steve K
October 31, 2019

I dislike projections that assume all of the balance will be exhausted at some point as the end date is so impossible to predict (as you say, the hardest thing to predict, but then you go ahead and do it anyway). It seems totally at odds with why people squirrel money aside and try to avoid going straight on the age pension - to have a better lifestyle. Much better if you adjust your spending to the income produced (possibly with a rolling 3 year average to smooth things out) than just keep on spending, even when circumstances (such as assumed return) change.
Alternatively you could calculate how much money does one need to produce an income of $61552 that actually grows at least with inflation; if you get a return of 7% with 3% inflation the net return is 4% which means you need$1.54MM to produce $61500 income that grows with inflation. Drawing down the capital should be minimised, no more than say 25% by age 85. So maybe $1.35-1.4MM would be the target. At least you have some wiggle room if circumstances change. Having a "plan" that assumes you will have to eat into your capital with a largely unknown 30+ year horizon is not really much of a plan and is perhaps yet another reason why 'financial planners' have such a dodgy reputation.

Raymond
November 17, 2019

As a 'financial planner' of a sort, I have been managing longevity risk quite successfully for a basket of clients for the last 20 to 30 years (most have created more financial wealth since retiring).

My personal view is that its bit ironic that its takes that long (i.e. 20 years plus) for a client to experience that outcome. My clients all know it works, they have lived the good life & now I'm joining them (having followed the same strategies myself). Of course, all of us advisers are 'a bit dodgy' as you say, and if the evidence of a successful outcome takes 20 years to verify then its pretty easy to assert that the 'value of advice' is a fairy tale!

Frank McIntyre
October 31, 2019

Graeme,
You lost me when you quoted the ‘comfortable’ lifestyle income as $61,522 p.a. I would argue that it needs to be at least 50% higher.
Regards,
Frugal Frank.

Geoff
October 31, 2019

Whilst I, personally, agree with you, these are benchmarked numbers which have been around for at least a decade and are updated regularly. Nothing to do with the author.

Paul
November 07, 2019

Hi Frank,

I feel 50% higher would be too high. Don't forget the $61,522 pa is made on the assumption it's a tax free income (other assumptions include the clients are debt and dependent free and the Centrelink Age Pension and / or other entitlements may kick in at some point in time) and therefore would be equivalent to a gross salary prior to retirement of around $80,000 pa. A 50% increase would be equivalent to a taxable gross income prior to retirement of approximately $131,000 pa.

From my observations in the industry over the last 30 years is that the average spend in initial years of retirement is between $60,000 to $70,000 pa increasing with inflation every year. Spending than slows down from around 80 years of age onward.

 

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