How much super do you need?
What’s a comfortable retirement income in Australia, and how much super do Australians need to achieve it? It depends on who you ask.
As they approach retirement, many Australians start questioning whether their superannuation balance is adequate. Perhaps they need to save some more?
A commonly cited figure is $1.6 million, but that is not an easy target for many people to achieve. Some experts say such a sum could result in them saving more than they need for retirement.
“Ultimately, there is no correct figure,” says Robert Bianchi, professor of finance at Griffith University and the director of the Griffith Centre for Personal Finance and Superannuation.
He says there are three factors that determine how much in retirement savings a person needs. The first is sources of income – superannuation, non-super savings and the age pension; second is the lifestyle they want to lead in retirement; and thirdly, their expected lifespan, which Bianchi describes as “the real big unknown”.
Superannuation is designed to last 20 to 22 years and, on average, about 50 per cent of retirees will need their superannuation to last longer, in some cases much longer. Bianchi says he believes the A$1.6 million figure is an attempt to address this longevity risk.
Additionally, a $1.6 million individual superannuation balance is the level above which many of the superannuation tax concessions cut out, which may be another reason this figure is so often cited.
Bianchi’s modelling suggests that someone with A$500,000 in super would run out of money, but A$1.6 million is probably enough. “The magic number is probably somewhere in between,” he says.
Nonetheless, Australians’ super balances mostly fall well short of even half a million dollars.
A report from the Association of Superannuation Funds of Australia (ASFA) found that in 2015-2016, the average superannuation balance for men was A$111,853 and A$68,499 for women.
The balances for those nearing retirement were better, but still short. For people aged 60 to 64 years, the average balance was A$270,710 for men and A$157,050 for women.
A modest lifestyle
ASFA sets a benchmark retirement income known as the ASFA Retirement Standard. For a “modest” retirement lifestyle – better than the age pension, but still only able to afford fairly basic activities – an annual income of A$27,648 is required for a single person and A$39,755 for a couple, recommends ASFA.
ASFA defines a “comfortable” retirement lifestyle as enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasional international holiday travel.
This requires an income of A$43,317 for a single person and A$60,977 for a couple. All calculations assume that the retirees own their own home.
Bianchi says, however, that aspiring to the ASFA modest retirement standard is not the answer. “To make Australia a better society, we need to ask what are the policies and what can we do to assist people to a more comfortable way of life in retirement.
That’s where I think we need a high [superannuation] contribution rate and we need people to put more money away, particularly if we’re going to have a lower-return world in years to come,” he says.
To achieve a comfortable retirement income by the ASFA standard, a couple would need a combined superannuation balance of a little over A$800,000, argues Nathan Zahm, senior investment strategist at fund manager Vanguard.
A couple who retired at age 66 with this super balance could be 95 per cent certain that their funds would last for the next 30 years. While this figure won’t apply to everyone, it is a good guide, he says.
The calculation assumes that when the couple retires they receive a very small age pension, but as they run down their superannuation balance over the subsequent years, their pension entitlement grows.
Scrimp and save?
However, many people don’t want to run down their retirement balance and so lead a more frugal life than is necessary, says Zahm. “Once people do retire, they have a tendency to be very conservative with their spending. They often will anchor to whatever balance they had when they retired.”
Zahm says higher super savings targets tend to come from financial advisers who, as a rule, serve wealthier individuals. “If a couple was accustomed to living on a combined salary of A$150,000 or A$200,000, [an annual budget of] A$60,000 may not really be the retirement they were hoping for,” he says.
The savings targets can also rise quickly if people want a higher retirement income, because the pension cuts out completely once a home-owning couple has assets above A$853,000, excluding the value of their home.
Thus a couple wanting an annual income of A$80,000 that would last for a 30-year period with 80 per cent certainty would need about A$1.6 million, says Zahm.
Brendan Coates, a tax, economics and budget researcher at the Grattan Institute think tank, says the current superannuation system, with a 9.5 per cent superannuation guarantee contribution – where an employer contributes the equivalent of 9.5 per cent of a person’s wage to their superannuation account – and the age pension, are enough for people to have an adequate retirement income.
“By adequate, we mean a retirement income that gives them the same living standard in retirement as they had during working age. That’s the critical point,” he says.
“If you’re earning $150,000 a year or $120,000 a year before you retire, then you might need $70,000 or $80,000 in retirement. But if you were earning $50,000 beforehand, then you probably need $35,000 to $40,000 in retirement.”
ASFA’s guides take a one-size-fits-all approach, he says.
As superannuation balances grow, one thing is certain: there will be continuing debate on how much Australians need to save for their retirement.