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How to ensure your superannuation secures your retirement

Written by

Shaun McGowan

At some point in your working life you’ll find yourself thinking about your retirement and how you will survive financially.

Hopefully, this is something you’ll think about earlier rather than later… …because the earlier, the better it will be for you in the long term.

When you consider your retirement, superannuation is a critical aspect. If you are a millennial/Gen Y or Gen Z you’ve always had compulsory superannuation and it’s likely you don’t even think about it. Just like income tax, it just happens.

Even so, ignoring super is a very bad idea. Australian millennials have the second lowest home ownership rate in the world. If you don’t own a home, you’ll need something else to provide security in the future.

That’s most likely to be your superannuation. That means that you need to make sure you’re on track and give your superfund the loving attention it deserves. To help you with that, ASIC’s MoneySmart website has some good advice.

If you’re self-employed people you won’t have an employer making contributions, you need to do this yourself, don’t neglect it. The buck stops with you and so do your earnings if you stop work.

Just how much income will I need in retirement?

The truth is, that depends on several factors:

  • Are you married or single?
  • Do you live in the city or in a regional area?
  • What sort of lifestyle do you want to have in retirement?
  • At what age do you want to retire?
  • What assets do you have or think you’ll have when you retire?
  • Will you claim the age pension or part-pension, or aim to be a self-funded retiree?
  • What is your life expectancy? (Your family history is a good yardstick for this one).

I know, that’s a lot of difficult questions.

A good place to start is to think about your current living standards (what you normally spend each month), then work out how much of your money goes on essentials and how much on desirables.

You really do have to split these (and be honest).

If you already live according to a budget, you’ve already done the hard work. If not, it’s time to take a good, hard look at your finances and figure out how much money you’ll need to meet your basic requirements…… and how much more to live in complete comfort.

Let’s consider lifestyle

SuperGuide outlined to four levels of lifestyle; basic, modest, median and comfortable.

They forgot one – luxury!

Interesting, ASIC’s Money Smart only has two levels, modest and comfortable.

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Retirement with a basic lifestyle

Income circa $36,000 a year for a couple, or $24,00 a year for a single person.

You could achieve this level without superannuation, by drawing the aged pension, and making use of all the seniors discounts and health benefits that are available at all government levels.

A calculation based on today’s rates shows that you’d living on 27.7% of the average Australian’s income.

Perhaps this would be enough if you’re happy to live simply – but if you’re used to a more lavish lifestyle, it would be a difficult adjustment to make.

A modest retirement lifestyle

‘Modest.’ Doesn’t that have an old-fashioned ring to it?

The annual income here is circa $39,500 a year for a couple, or $27,500 a year for a single person.

This is not much higher than the basic life-style income, but it gives you a little extra cash at your disposal. It’s more than the maximum state pension, so you’ll need some extra funds to achieve this.

Median lifestyle in retirement

Still not exactly a lifestyle where you can kick up your heels, this needs an income of $50,023 for a couple, or $35,189 for a single person.

Comfortable in retirement

This sounds pretty good. To live what SuperGuide considers ‘comfortably’ you’ll need $60,604 a year for a couple, or $42,953 a year for a single person.

With this level of income, you can expect to be able to enjoy more recreational activities, travel regularly, and afford to purchase higher level private health insurance and higher quality household goods.

But according to SuperGuide, you still can’t expect to have an ‘outlandish’ lifestyle on this level of income.

What if you want to be “outlandish?”

If you’re really looking to live it up in retirement, you’ll need to save a lot more, so may want to start ploughing money into your superfund now!

Of course, there’s a good chance these figures will change as you get closer to retirement, so it’s a very good idea to keep an eye on the ASFA Retirement Standard.

Published since 2004 and updated quarterly, this is a handy benchmark based on cost of living statistics and other changes both in the economy and social expectations.

It’s a great resource to ensure you are on track with where you want to be in the future. Ok.

How much cash will I actually need to save?

Good question. Of course, all the numbers I’ve been talking about so far are an annual income. What you really need to know is what actual sum will you need to have saved by the time you retire.

The lump sum will vary depending on the type of investments you’ve made to prepare for retirement. By that, I mean, how much interest are you earning, from how many sources.

The lump sum will vary depending on the type of investment you have made, for example, is the annual rate of return 3%, 5% or 7%, is your portfolio aggressive or conservative?

According to SuperGuide, if you’re part of a couple wanting a comfortable lifestyle you’ll need investments worth $840,00 if your return is 3% per year, $575,00 at 5% per year and $415,000 at 7% per year. You would also receive a part-pension.

As a single, to have a comfortable lifestyle you’d need $710,000 worth of investments at 3% return per year, $505,000 at 5% and $355,000 at 7%, plus a part-pension. That good news is, it’s all rather less than the scary $1 million figure which often gets bandied about.

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But still a substantial sum to save – which definitely makes it something you need to get working on sooner rather than later.

It’s worth noting that these figures presume a retirement age of 65.5, but the Australian retirement age has now risen to 66 or 67, depending on when you were born. They also assume a life expectancy of 25 years in retirement.

If you hope to retire early or live on your savings for longer, you’ll obviously need more!

You’ll also need to consider your children. Are you SKIers (Spending the Kids Inheritance) or do you want to leave something to your children? Hopefully you don’t have KIPPERS - Kids In Parents' Pockets Eroding Retirement Savings!

Jokes aside, children and even grandchildren can have a significant impact on your later years.

We often hear about grandparents being carers for their children and grandchildren alike. While there is a carer’s allowance, it’s likely it wouldn’t cover your additional expenses. So it’s a good idea to build a contingency into your retirement calculations.

Conclusion

If you want to live well after you retire, you need to start planning as soon as possible.

Regularly check your superannuation status – don’t just assume contributions are regularly being made by your employer (we’ve all heard the horror stories).

Market fluctuations and changes to fees and charges can also impact your balance. And the goal posts keep changing when it comes to claiming the old age pension (such as the asset threshold change introduced by the government in 2017). Unfortunately, we can only expect more changes over time, which will probably make it even harder to access a government pension.

All of this means that you need to keep a very close eye on what’s happening with your super. If your fund isn’t performing as it has in the past or you know of a better performing fund, think of changing. It’s surprisingly easy these days – generally, the fund you want to move to will do the hard work.

Above all, talk to a financial planner and get some solid, independent advice to help you figure out exactly what your retirement goals are, and how to meet them.

As ASIC’s MoneySmart says: “when it comes to super, size does matter.”

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About the Author

Shaun McGowan from money.com.au

Shaun

McGowan

Shaun McGowan

Shaun is the founder of Money.com.au and is determined to help people pay as little as possible for financial products. Through education and building world class technology. Previously Shaun co-founded CarLoans.com.au and Lend.

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