Australians might now be more aware of the real need to crank up their superannuation savings, but working out exactly how much is needed to fund a retirement that is free of monetary worries is still difficult. There are so many variables at play – with the most important being that it is very hard to predict exactly how long we are going to live for.
According to research by the Association of Superannuation Funds of Australia and Westpac, to have a “comfortable” lifestyle, one that allows a good standard of living, private health cover, a decent car and new clothing, as well as the opportunity to travel both domestically and overseas, a couple will need almost $50,000 a year. To fund a “modest” lifestyle, which doesn’t include many bells and whistles but is a better option than relying on the government pension, the figure is around $26,000 per couple.
So how much do you need to have in your pension pot to get access to this type of income? Financial planner at Commonwealth Financial Planning Daniel Molesworth says that to generate around $40,000 a year, you need approximately $800,000 in super savings. And relying solely on employer contributions is not advisable. Molesworth believes that we should be making additional contributions of around 4-5% of our salary, over a 30 year-period – assuming a real rate of return of 4%.
Obviously, Generation X and Y will have a much easier time of it, having been born into a working landscape which includes compulsory super. But many baby boomers are now being forced to make up for lost time. According to research by the Commonwealth Bank, despite 60% of baby boomers expecting a better lifestyle than their parents and intending to live life to the full, fewer people in 2008 were sure they would be able to afford the lifestyle they desired than those surveyed two years ago. The Lifestyle Aspirations Survey also found that 53% planned to continue working past retirement age in order to supplement their income.
So is there a magic tool available to help us work out what super contributions we need to be making on a regular basis? Molesworth says as a rough rule of thumb, the following calculation can be useful:
100/realistic net rate of return (after removing inflation, say 5%) multiplied by the required retirement income. So for a retirement pot of $800,000, the sums would stack up as 100/5 x $40,000.
Alternatively, Dante De Gori, technical manager at ClearView Retirement Solutions says you should aim for 60-65% of your pre-retirement income as your required income needs in retirement. This generally assumes that by retirement age you have paid off the family home, no longer have children (or expensive schooling) to fund, perhaps are maintaining just one car per couple, and have no additional debt obligations.
De Gori adds that unless your goal is to be self-funded, your income needs do not need to be full-funded from your savings. Instead, access to the Age Pension can help supplement your income needs, and prolong your savings. Andrew Carra, principal adviser at Carra Wealth Management adds that while many people won’t qualify for the age pension at retirement, they often forget that they are likely to receive it years down the track. “This will prolong the life of their capital and in turn reduce their living expenses through concessions on utilities.”
And to ensure that inflation doesn’t erode the purchasing power of your capital, Carra says it is important to make sure that part of your super savings are invested in long-term asset classes such as shares and property. “Although these investments can be volatile, history shows us that a patient, long-term investor is often rewarded with returns above inflation and cash over the long-term.”
De Gori adds: “It should be remembered that economies are cyclical. Even if you are turning 65 right now, you would hope to be retired for 20-25 years or more, which means that retirees should be taking a long-term view as well.”
Tips on how to boost your retirement savings
* Every time you get a pay rise, stgote a portion of it to super. This won’t impact on your lifestyle at you will be investing part of your income before you have even received it.
* Set up a yearly budget and map out your planned expenses on a month-by-month basis. Once you get a handle on how much it costs you to live, you can then confidently start to plan putting funds away into super.
* Younger people should take a long-term view and be active in deciding how their super is invested. Investing in the lower risk assets that many super funds have as their default option isn’t very smart and could literally cost you ten of thousands of dollars in retirement.
* For the over 55s, there is now the ability to put a lot more into super without cutting your take home pay, thanks to the transition to retirement strategy.
* Salary sacrifice, co-contributions and spouse contributions are all very powerful methods of maximising your retirement savings.
* Don’t forget about making the most of short-term opportunities to boost your pension pot, such as the government co-contribution for low to middle income earners.