how much super?

Posted on June 16 · Comments

It’s the 64 million dollar question, isn’t it? How much superannuation do I need to retire on?

I admit that this is a pretty dry topic. Like many Australians (I presume anyway) I mostly ignore my super, thinking that I will worry about retirement later, hoping that it will be enough to retire on. Doing the research to write this article gave me a bit of a wake up call.

I was going to show how to calculate your super needs but there are way too many variables and it becomes too complex. For instance, you need to account for:

average compounding investment return (dependent on your investment mix and ignoring anomalies like the GFC)
compulsory super contribution (currently 9% of your income. Assuming that you get regular pay rises, this amount isn’t fixed, complicating the calculation)
voluntary contributions, co-contribution scheme and salary sacrifice
average inflation
fees: both fixed fees and admin fees as a percentage of the yearly super balance
taxes
insurance
when you expect to retire and how long you expect to live
if you plan to have breaks from work, say if you stay at home to raise a family

So scratch that, there is a much easier way to calculate your retirement fund needs and that is to use one or more online calculators. I have listed a few at the end of this article.

However, before consulting an online super calculator, there are a few things to consider. If you haven’t sat down and thought about your superannuation, try this exercise, it won’t take long. If you’re like me, you will get quite a surprise at the outcome.

Working out your retirement fund needs

1. Your retirement lifestyle

The first thing is to think about what kind of lifestyle you want in your retirement. Maybe you want to travel, maybe pursue some hobbies. How you imagine your retirement will influence the amount of income that you will need to fund that lifestyle.

2. Calculate your expected expenses

Hopefully, you already keep a budget, so this exercise will be a snap. What you need to do is work out your current expenses. Deduct those expenses you won’t have when you’re retired and add in any that you expect to have. For example:

Deduct your mortgage repayments if you plan to have your home paid off prior to retirement
Deduct the cost of caring for children (hopefully) they will have moved out by then
Adjust the cost of living if you plan to move to a cheaper location
Add in the cost of travel if that is what you plan to do
Add in any extra cost of healthcare

3. Work out your annual income needs in retirement

Once you’ve adjusted your current expenses to those expected in retirement, work these out as an annual amount. So if your annual expenses come to $40,000, this is the annual income you will need your superannuation fund to provide.

Out of interest, what percentage of your current yearly income is the annual retirement income that you worked out? Common advice is that the average person or household will need between 60% and 80% of their current annual income in retirement. So if your current annual income is $50,000, according to the experts, you will need at least $30,000 per year in retirement.

4. Calculate the future value of your annual retirement income

Let’s assume you need $40,000 per year to live off in retirement. We know that because of inflation, $40,000 won’t buy the same amount tomorrow as it can today. The $40,000 is in today’s dollars. So we need to work out the future value of our annual predicted retirement income. Assuming that you want to retire in 20 years time and the average inflation rate is 2.5%, the future value of $40,000 will be $65,545. This is the actual annual income amount that you are aiming for. Plug your own numbers into this calculator and it will show the future value of your retirement income and answer the following points.

5. Calculate how much you need to save

Once you have an annual retirement income amount, you then need to work out how much you need to save in order to reach this target. Morbid as it seems, this amount is based on your estimated life expectancy¹. The above calculator will quickly calculate how much you need to save based on your predicted annual retirement income needs (in today’s dollars).

6. Is your employer contribution enough? Work out how much extra you need to save.

Finally, you need to work out how much you should be putting away now to reach that lump sum amount. I was only a little surprised to see that the 9% compulsory employer super contribution was not sufficient. I would bet that for most people, this would be the case. The calculator above breaks down how much the compulsory super contributes to your retirement goals and how much extra you need to contribute to reach those goals.

An average example – Jane and Joe

Jane and Joe are both 30 years old. They both have $15,000 each already saved in their super fund. At the moment, Jane and Joe both intend to work full time without a significant break until the age of 65. We will assume their life expectancy is 90 years of age¹.

Jane and Joe make the average Australian income of $45,000 each or $90,000 gross for the household per annum².

When thinking about how much they will need each year in retirement (in today’s terms), they write out a rough budget, predicting their retirement expenses. Jane and Joe will have paid off their mortgage by retirement so they want to take that out of their retirement budget. They intend to travel a bit and live comfortably but frugally.

They have an average initial mortgage of $300,000 and at 6.5% interest pa, their repayments are $23,000 per year or 30% of their net income. When we deduct their mortgage from their gross income, they will still need $74,500 per annum or 70% of their income to maintain their current standard of living after retirement.

Jane and Joe decide that they can be a little bit careful with their money and still maintain a good standard of living, so they aim for 50% of their current income or $45,000 per annum.

The future value of $45,000 at retirement age (35 years from now (age 65) and assuming an average 2.5% inflation rate) is $106,794 per year. To achieve this annual retirement income, Jane and Joe will need to have accumulated a combined $1,821,735.

To reach this amount, Jane and Joe need to contribute a combined $15,850 or so per year up until retirement (this amount accounts for tax and assumes a 6% return, net of fees). The combined yearly 9% compulsory employer contribution comes to $8,100. This leaves an annual shortfall of $7,750 needed to reach their retirement goal³.

Assuming they take advantage of the government’s co-contribution scheme⁴ and contribute an extra $1,000 each yearly, they can each be matched dollar for dollar up to $564 (adjusted for over the threshold income). The total extra payments will be $3,128, still leaving an annual shortfall of $4,622.

Jane and Joe have several options:

Lower their expectation of their standard of living in retirement
Hope that their superannuation fund’s returns are better than predicted
Hope that the old age pension is still adequate in the year 2045 and following
Contribute extra to their super, maybe via salary sacrifice
Self manage their super in an effort to get better returns
Build up investments outside of their superannuation fund to supplement their super income
A combination of the above

(In the 2010 Federal Budget, the government announced that the superannuation guarantee paid by employers will rise to 12% in the 2019-20. It will be a gradual rise from the now 9% over the period. This rise in super is dependant on whether the mining tax goes ahead⁵.)

Super Calculators

Most superannuation providers have a website with a super calculator, so if you can, use the calculator provided by your fund, it will reflect your actual fees and investment returns. Otherwise try one or more of the following calculators. Remember, the assumptions that each calculator is based on will be different, so you will get different results across a range of calculators. Also, real life rarely conforms to what is expected (the GFC for example), so these calculators help give estimates, don’t depend on them for an accurate account of your future super balance.

ASIC Super calculator. This calculator allows you to plug in your own numbers such as investment returns and compare super funds.
Invest smart calculator. Allows you to easily calculate your super needs working backwards from required annual retirement income.
cBus calculator allows you to set the retirement income that you desire and tells you the lump sum needed to provide that annual income. You can adjust most of the necessary variable and can switch between present and future value.
AMP Super calculator is very simple and easy to use but doesn’t offer much.
Sunsuper calculator includes options for working out pension income and including your spouse’s super.

Notes