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It’s a question that many Australians have asked themselves since obligatory superannuation was introduced: just how much super should I have before I retire?
A recent survey by consumer advocacy organisation, Super Consumers Australia, has revealed, unsurprisingly, that most Australians hope to maintain their standard of living during retirement.
And the superannuation system, in which employers are obliged to divert 10.5% of an employee’s salary into a fund, is a great way to ensure a comfortable retirement.
“Superannuation is a wonderful vehicle,” says David Reed of the Retirement Advice Centre. “It’s like the chassis of a car. It gives you fantastic taxation benefits and you pay no income or capital gains tax on your investments in the superannuation ‘chassis’.”
A means-tested aged pension is available to those who meet the eligibility requirements, and many people rely partly on the government’s age pension and partly on their superannuation to fund their post-work lives.
“Most people want to have the highest standard of living that is possible, rather than just maximizing their access to the age pension,” says Reed.
“Having additional savings on top of what an employer puts into super will boost a person’s overall income throughout retirement and leave them better off overall.”
But how much super do you really need to retire?
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Do you really Need a Million Dollars to Retire?
According to a 2021 Cost of Living Survey by news.com.au, almost a third of Australians believe that they need to have one million dollars saved for retirement. Half believe they need at least $750,000.
The good news is that most people will not need anywhere near this amount.
“People in the wealth management industry use this figure [of one million dollars] quite a lot, but it doesn’t reflect what the average Australian is actually spending in retirement,” says Xavier O’Halloran, director at Super Consumers Australia (SCA).
“Consumers get intimidated by seeing really high numbers and switch off from planning for retirement, which isn’t a good outcome. We also don’t want to see people living on a more meagre income than is necessary.”
Only high expenditure households will need a million dollars to sustain their living standards when they stop working, according to SCA.
Recent research by SCA found that a low-income single household requires $88,000 by the time they reach retirement age, and a couple requires $111,000. A medium expenditure single requires $301,000 and $402,000 for a couple. A high-expenditure single household requires $745,000, while a couple needs $1,003,000.
These figures are based on the average retirement age of 65 in Australia, and an average life expectancy of 90. It also assumes that the retirees own their home outright.
The Good News? Some of us Will Be Wealthier in Retirement
A report by the Grattan Institute blames the “financial services industry fear factory” for perpetuating the myth that Australians don’t save enough for retirement. Australians often have more than enough. Thanks to savvy investing, today’s retirees often pass away with a nest egg that is just as big as it was on the day they retired.
Furthermore, modelling by the Grattan Institute found that today’s average worker can expect a retirement income of at least 91% of their pre-retirement income. Low-income Australians may actually have more financial security during retirement than they did throughout their working lives.
“Many low-income Australians will get a rise in pay when they retire, because the Age Pension and the income they get from compulsory retirement savings will be higher than what they earnt before retirement,” states the report.
Does it Matter if you Own Your Home?
The main caveat to this more positive picture of retirement is that it only applies to retirees who own their own home outright.
All expenditure level groups reported positive financial wellbeing during retirement, according to SCA’s survey. Rates of financial hardship were found to be higher among renters, who account for approximately one third of retirees, according to O’Halloran.
Homeowners can take advantage of the government’s home equity access scheme, which allows them to draw down on their home equity as an income during retirement. It can be used to supplement the age pension.
“There are some major structural issues concerning barriers to homeownership and home affordability in Australia that need to be addressed to ensure all Australians have a good standard of living in retirement,” says O’Halloran.
He points to the fact that older women are the fastest-growing group of homeless people, due to being more likely to take on unpaid carer duties and employed in lower paid professions. The consequence is accumulating 42% less super than men.
What if you Worry You Won't Have Enough?
According to O’Halloran, most people start thinking in earnest about planning for retirement in their fifties. A first step is to review current expenditure to look for areas to make savings, and put those savings into the super fund.
No matter what, O’Halloran believes it is never too late to begin planning for retirement.
“There is always something to be done,” he says.
In Reed’s experience, what most people overlook is the need for different strategies when it comes to saving for retirement versus managing expenses during retirement. He likens it to going up and down a mountain.
“The accumulation phase is when you’re climbing higher and trying to maximize the amount of savings you have. Risks can lead to higher returns,” he says.
“To climb down the mountain, you need to minimize those investment risks. You want to slow your withdrawals as you come in to land.”
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Frequently Asked Questions (FAQs)
How much super should I have?
This is the eternal question and one that is entirely dependent on your expectations for retirement. Do you own your own house? If so, you’re likely to need less come retirement time. How much do you want to travel or enjoy luxuries? This too will impact how much you will need. The good news is that many Australians overestimate how much super is required to enjoy financial wellbeing in retirement.
How much super do I need to retire on $100,000 a year?
There is a range of calculators available to help you determine how much you will need in super to fund your retirement, but be aware that these do not take into account your individual circumstances: how old you are, your fund of choice, your savings and spending habits. It will also depend on how you intend to draw on your super: as a lump sum or an income? If you have a goal of retiring on a certain amount of money then speak to a professional and ethical financial planner who can help outline what you will need to do to reach that annual figure. You may not need as much as you think.
