How much super do you need to retire? The million dollar question…

How much super do you need to retire? If you have read the recent press or asked Google, you’d be forgiven for being confused. A quick internet search suggests a 65 year old retiring today will need anywhere from $500,000 to $2 million in retirement savings.

Retirement Plan

The truth is there is no universal magic number (sorry to disappoint you). While it might seem like a standard answer: how much a person needs to fund their retirement relies solely on their individual circumstances.

Here are some of the things that we consider when we are calculating that “magic number” for an individual:

  • How old are you?
  • When do you want to retire?
  • Do you have a partner? Will they retire at the same time?
  • Will either of you work part-time?
  • Do you own your own home?
  • How much do you want to spend in retirement? Will there be extras like holidays, renovations or car upgrades?
  • Do you want to leave your children assets apart from your family home?
  • How is your super invested now?
  • How will your super be invested in the future?
  • How likely is that you will receive the Age Pension?

If your circumstances aren’t too complex, many of these aspects can be boiled down into a simple expenditure multiple. However, the fly in the magic-number-ointment is Age Pension. Specifically, what will Age Pension payment rates and means testing look like over time? We believe relying on Age Pension to remain in its current format over a 2 to 3 decade period poses a huge risk in calculations of required retirement lump sums.

For example, the ASFA Retirement Standard is a widely-referenced source for how much you need to retire (in fact, on member’s annual statements, some superannuation funds were tracking member balances versus the ASFA figures to determine if members were close to being able to fund their retirement). The ASFA assumes that current Age Pension payment rates and means testing thresholds increase with inflation throughout retirement. In August 2015, due to tightening of Age Pension means testing, they were forced to increase their estimated retirement savings required for a couple who wanted to fund a ‘comfortable retirement’ (a bit under $60,000 per year in today’s dollars) by $130,000, from $510,000 to $640,000 (that’s a 25% increase!). Anyone relying on these figures (in particular, the overly optimistic Age Pension assumptions) will either run out of money much earlier than expected, take a reasonable pay cut in retirement or will need to keep working longer than they wanted to.

The balancing act
In fact, balancing assumptions in relation to Age Pension, returns and longevity risk is key to retirement planning. If these assumptions are too aggressive you might run out of money and/or take a sizable pay cut in retirement; if they are too conservative, you might work for much longer than you want to or not enjoy retirement as much by being too frugal.

So, where does that leave you?
The only way to know how much you need for retirement is to formulate your own retirement plan. This looks at the numbers and also your attitudes towards retirement: i.e. would you rather enjoy more of your money in the first part of retirement and risk running out of money late in retirement or would you rather spend less now to give you more certainty that you never run out of money. Everyone’s circumstances and attitudes vary.

Get started on your retirement plan today. Give our Senior Financial Advisor, Sam Campbell, a call on 0268832200.

Related article: Retirement: The Great Unknown


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