Retire, How much super do i really need?

How much super do I need to retire? Give me a number!

Although a very common question about how to retire, unfortunately there is no rule of thumb that can be applied. Annoying I know, but here is why.

Quite simply, we are all different. (Don’t worry it gets better).

Firstly, we contribute different amounts to super due to a difference in salaries and contribution strategies.

We have different employment situations which can impact the amount we contribute to super. For example, the self-employed tend to contribute less to super than those who are employed by someone else.

Some of us take career breaks to raise a family and some of us don’t ever return to the paid workforce. Some of us will instead focus on the accumulation of wealth and assets outside of super (like paying off our mortgage or purchasing investment property).

As a result, our superannuation balances all grow at different rates. On top of this, fee and fund performance differences will impact our balances.

The super industry is awash with statistics and forecasts though – surely there is a way to at least get a ball park idea you ask?

A good starting point – look at what the target is.

If you want to know if you’re on track for your age, you need to know where you’re headed first.

What does your retirement picture look like?

If you’ve even gotten to thinking about this yet; are you taking a bi-annual overseas holiday’s, joining the grey nomads and journeying around Australia or are you happy to stay put, sitting in the local coffee shop of a morning still figuring out what it is you want to do in your ‘old age’?

My point is that no two retirement pictures will look the same and the lump sum needed to finance that retirement will be different as well.

You need to think about what annual income you will need in retirement.

Remember that you won’t have any dependents at this point (fingers crossed) and hopefully you can assume that you’re mortgage free as well.

If you don’t know where to begin, Money Smart states that high income earners can assume they will need roughly two thirds of your income to maintain the lifestyle they are accustomed to in retirement.

The Association of Superannuation Funds of Australia (AFSA) publishes a quarterly guide on the topic. To retire at age 65, their research indicates an income of $58,444 for a ‘comfortable’ lifestyle or $33,799 for ‘modest’ lifestyle in retirement. To give you an example, budgeted into the figures for a ‘comfortable’ retirement is $200 per week for food and $300 per week for all leisure activities (including holidays). You can see the full breakdown on their website.

You then need to think about how long you might live for.

At age 65, residual life expectancy (i.e. how much longer you are expected to live from age 65 onwards) is 19 years for men and 22 years for women according to the ABS. So the sum you need to fund your retirement would need to last at least this many years.

The 2015 Intergenerational Report however, released by the government in March, forecasts a longer life expectancy for Australian’s with both men and women living comfortably into their early 90’s. So if we’re living longer, we’re going to need a bigger lump.

What lump sum amount do you need to meet your retirement income?

This appears to be a moving target dependent on:

The retirement income you want
Your life expectancy
Assumed investment returns and fees
Whether you will draw down on your capital or live off the income only
Whether you will qualify for the aged pension

The Australian Financial review recently published that for a $100,000 retirement income; a $2 million nest egg is required for a couple in order to maintain a similar lifestyle in retirement. This sum assumes that your super balance will be kept intact.

The AFSA retirement standard states that for $58,000 per year (a ‘comfortable’ retirement) you will need $510,000 for a couple. This sum assumes that your super balance will be drawn down and the aged pension will make up some of that income as well.

It seems everyone’s got their own idea on what the magic number is for you to retire. I’m confused – how about you?

Fed up with trying to find the right article which best explains my situation – I’ve gone and done my own calculations (with a little help from husband who’s pretty good with numbers).

How I calculated our retirement lump sum target

I didn’t factor in the aged pension. Those that do factor this payment into their calculations do so based on today’s eligibility requirements and payment rates. Given we are roughly 30 years away from traditional retirement age, I think it’s safe to assume that eligibility and payment rates will change many times over. If I’m being completely honest, I’d like to think that we won’t have to worry about needing the pension at all.

For the sake of the example I’ve aimed for an $80,000 per year income in retirement. I’ve included a life expectancy of 90 (I’d rather my money last longer than me, than the other way around) and I’ve assumed we’ll be drawing down on our super balance (I’ll try and leave the kids something else!).

Based on this, in order to retire at age 65, we will need a combined lump sum of $1.5 million for the both of us. That’s assuming a 5% investment return net of fees and 2.5% income growth all the way to age 90.

Am I on target?

Now that we have a target we start to understand whether we’re on track or not for our age. By looking at our current superannuation balance and the lump sum we need at retirement – we can see the shortfall at this point in time.

However it’s important to keep in mind at this point that the lump sum needed at retirement is not simply the sum of all the contributions made to your account between now and then. Your balance will also be bolstered by investment growth over the long term. By how much will depend on how your funds are invested.

Superannuation is statistically the largest income producing asset in retirement for Australian’s. For the few that have assets like shares and investment property outside of super at retirement, these assets will contribute to total retirement income as well. In this case, only a smaller annual income is needed from superannuation meaning only a smaller balance is required to meet the same level of income.

Safe to say we are a little behind at the moment – but at least we know where we are heading!