Answering the question of how much super is enough for retirement is a little like asking how long is a piece of string. There are so many variables involved that it is an almost impossible question to answer. However, with the right approach a reasonable estimation can be calculated.
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Get Started by Setting Your Goals
The reality for most Australians today is that they find themselves having to work through to 60 or 65 simply to build up a sum of capital to allow them to survive in retirement. This requirement to work to such an age has its foundations in poor financial planning.
The standard method employed by people in their 40s and 50s – around the time that most begin to give serious consideration to their retirement – is to calculate the lump sum needed to provide the same income as they receive today. Unfortunately, what would suffice as a liveable income today is highly unlikely to provide the desired lifestyle in retirement.
The trick to calculating a realistic lump sum requirement is to figure out what the likely spending needs will be post-retirement and then work back. This not only needs some serious thought as to lifestyle, but to probable longevity, too.
The likelihood of living for a further 20 or 30 years after retiring is increasing daily as medical capabilities increase. Include other elements in the calculation of super (such as inflation, healthcare needs in old age, and lifestyle wishes), and it becomes evident that not only is there a need for intelligent investment through to retirement, but also through the retirement years.
Don’t rely on the social security net
It is a myth that social security payments will provide for any shortfall in super funds. Over the next few decades, Australia, like the majority of other developed countries, will find itself increasingly reliant on a decreasing working-age population. By 2029, Australia’s retirees will number around 8.8 million. That is treble the number of a quarter century ago. Only the most foolhardy folk believe the government’s finances and annual tax revenues will be able to support the age pension in the future as it does now.
Meeting basic needs
The majority of retirees in Australia currently receive the full amount of $22,200 per annum for a single person or $33,500 for a couple by way of the age pension. Most have repaid their mortgage in full.
However, according to AFSA retirement standards, these amounts barely cover the basic cost of living. The result is that, even today, many retirees are living on the breadline, budgeting and spending for a frugal lifestyle that they had probably never envisioned during their working years.
It is clear that planning for retirement not only requires a considerable amount of thought, but also an acceptance that it simply is not feasible to make the age pension the centrepiece of financial planning for retirement.
Tomorrow’s financially stable retirees will have thought about what kind of life they expect to lead in their retirement years. Using this information, they will have put their reliance on the factors that they control today and in retirement – savings, investments, and capacity to earn – and not on an increasingly fragile social security system.
So, how much super do you need to retire?
Once understanding this reality, only then can tomorrow’s retirees begin the necessary retirement planning today. A financial advisor is key in this area, helping their client to fully assess retirement lifestyle requirements and then frame these in financial terms. Consideration will need to be given to investment styles and potential returns, basic costs of living, healthcare needs, and the effects of inflation on income and costs.
Muirfield Financial Services, with extensive experience in the area of retirement planning, has produced a series of easy-to-read reports that will help people achieve perspective in their retirement planning. These reports are available to download for free and cover the essentials of retirement planning such as:
- The impact of inflation
- How to outlive your nest egg
- The risks of the SMSF
- Living tax free in retirement
- How to calculate your nest egg requirement
- And more
The evidence from recent history and today’s enforced frugality in retirement is that it is never too early (or too late) to begin serious retirement planning.