Better-off need to save more super

Posted 25 April, 2017

Source: SMH

How much will you need to save for a comfortable retirement? If you're clueless you're not alone. 

Most people, apart from those getting financial advice, are unlikely to have much of an idea. 

The ASFA Retirement Standard says a home-owning couple needs just under $60,000 a year between them for a "comfortable" retirement. 

The standard is useful, but it's a one-size-fits-all number that can be less relevant for higher earners. 

The better-off you are, unless you are very well off, the more likely it is that you will be disappointed with your standard of living in retirement.

A "comfortable" retirement is a relative to your lifestyle while working. 

Rather than aiming to save enough to support a pre-ordained income in retirement, it's better to aim for a retirement income that is a percentage of income when working.

That's the thinking of UniSuper, which has developed a retirement adequacy index for its members that measures members' projected retirement incomes as a percentage of their pre-retirement salary.

The members of the super fund are financially better-off than most workers. 

Using 65 per cent income replacement level – a figure often used internationally as needed for higher earners to enjoy a comfortable retirement – higher earners would have to make significant contributions to their super while working to achieve that. 

That's even more so after the tightening of access to the age pension that came into effect at the start of this year and for those for whom retirement is not that far off and have not had the benefit of the higher compulsory super for all their working lives. 

Let's take a couple earning $100,000 each as an example. Sixty-five per cent of $200,000 is $130,000-a-year in retirement.

Now let's put that into the Australian Securities and Investments Commission's retirement calculator.

A pair of 50-year-olds with $600,000 already saved in super between them who intend to retire at age 65 would likely receive only about $56,000 in retirement.

By sacrificing 15 per cent of their salary each into their super, or a combined $30,000 each until they retire at 65, they boost their retirement income to just under $70,000.

That's just under 54 per cent of their pre-retirement income. The reason that salary sacrificing doesn't boost retirement income by more is that the couple receives less age pension. 

They can't salary sacrifice much more anyway as they would exceed the new, lower $25,000 cap on salary sacrifice contributions that takes effect from July, which includes the 9.5 per cent super guarantee.

The good news (in a way) is that we spend less as we go through retirement, yet the retirement calculator assumes that we need the same amount each year until age 90.

That better-off retirees spend less in as they age makes sense. For example, they may travel overseas each year or so, but are unlikely to continue to do that into advanced old age; whereas those on modest incomes take their holidays closer to home. 

Even after allowing for lower expenses of older age, the numbers are sobering.