Obviously what people want for their retirement will vary from person to person. It depends on your age, the type of lifestyle you want and the wealth you have inside and outside of super. The super system only started in 1992 at relatively low contribution levels so many older workers may have low balances which possibly won’t be enough to completely fund their retirement. However, all things being equal, younger generations should arguably be in a better position to self-fund retirement at the current super guarantee rate of 9.5% which is set to rise to 12% by 2025. But the sooner they start planning, the better.
There are many views on how much you need to retire. This is because everyone’s circumstances are different. The Association of Superannuation Funds of Australia (ASFA) for example, suggest that to achieve a ‘comfortable’ lifestyle in retirement you’ll need $545,000 if you’re single and $640,000 if you’re a coupleview disclaimer1. However, NAB recently did a survey and found that on average people felt they needed over $1.1 million in retirement savingsview disclaimer2.
I don’t think people should be focusing solely on their super balance. Instead I think the real question is, what lifestyle do you want? Look at your total wealth, including assets outside of super and your eligibility for the Age Pension. For people with modest balances who don't have a lot of assets outside of super, the Age Pension remains an important pillar of the retirement system.
For younger people who have time on their side, the earlier they start engaging with their super, the better the outcome they could have.
Again, this very much depends on your personal circumstances and the lifestyle you want. In general your spending will be a percentage of the after-tax earnings that you had while workingview disclaimer3. There are also a few guidelines you can look at. For example, ASFA believes to be ‘comfortable’ in retirement, a typical couple aged 65-85 would need around $60,000 a yearview disclaimer4.
We often tell clients that, in our view, there are three broad stages of retirement, and you’ll typically spend differently during each stage. Firstly, there’s the active stage when you first retire and you spend more because you might be renovating your house, taking holidays and being active in your hobbies. You might then settle into a simpler lifestyle where your costs are usually less. And finally, you have a supported lifestyle where your expenses support your health and assisted living.
People want to have a stable level of income in retirement, so being able to estimate life expectancy is really important. In the 1980s life expectancy at retirement was to about 74 years, but now, if you’re a male it’s 85 and 88 if you’re female. If you’re a couple, there’s a 33% chance that one of you will live to age 94.5. And it’s really important to recognise that 50% of people live longer than these averagesview disclaimer5. So while statistics are a good starting point, you can’t assume that they will reflect your own individual circumstances. The challenge that we have as a nation is that the vast majority of our retirement funds tend to be in account based pension products, meaning you have to estimate how much you can take out each year, while ensuring you have enough to last a lifetime. So planning becomes critical.
Between 55 and 75 years, when your super balance is typically at its highest, it’s particularly important to try to manage this risk. From an investment perspective there are a few solutions that might be helpful in this regard:
If you are concerned about managing risk, it may be worthwhile speaking to a financial adviser who can help you tailor an investment solution to meet your specific goals.
That’s a good question, but the short answer is no. Everyone has different expectations about their retirement and different views on the amount of risk they’re prepared to take, so there’s no silver bullet. The industry is working hard to develop more longevity products (products that will give you an income for life) and better account based pensions, but I think retirement is a lot more complex and it’s likely we’ll see it’s a combination of products that are needed to meet people’s needs.
Retirement products are constantly evolving and new ones are available all the time, so I really think it’s important to seek advice from a financial adviser.
view disclaimer1. ‘ASFA Retirement Standard’, June 2018.
view disclaimer2. ‘MLC Quarterly Australian Wealth Behaviour Survey’, NAB, Q1 2017.
view disclaimer3. The ASIC MoneySmart website for example suggests that to maintain the same standard of living in retirement, a replacement rate of 67% of pre-retirement income would be required by above average income earners.
view disclaimer4. 'ASFA Retirement Standard Detailed budget breakdowns’, June 2018.
view disclaimer5. ‘Australian Life Tables 2014 – 2016’, Australian Bureau of Statistics.
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