To retire without financial stress you need to get real with your sums, writes Neal Vaughan.
Industry experts say $1m-plus is the “magic” figure for a comfortable retirement, despite official recommendations of $545,000.
But in trying to work out exactly how much superannuation you need to retire comfortably, we need to start with a simple understanding of why we save it at all.
"Super is intended to provide for a more comfortable retirement. It's not, as many think, all about retiring early and living the life of the rich and famous – of course that's great, but for most it's unrealistic," says The Association of Superannuation Funds of Australia chief executive officer Pauline Vamos.
The association produces a series of benchmark figures to help super funds and their clients – that's you – work out their retirement income needs.
It calculates that as of December 2015 a couple will need an income of over $58,000 every year to support a comfortable retirement lifestyle that includes some travel, eating out and running a car.
To maintain that income for 20 years, by today’s calculations they’ll need around $640,000 in their super at age 65. For single people the figure is $545,000 equating to an annual income close to $43,000.
These figures assume retirement at 65, account for inflation and for access to the age pension as it stands now. They also assume you will draw your super down to zero by age 85 – today's average life expectancy.
But they don't tell the full story.
Source: ASFA December 2015, ASFA Retirement Calculator Jan 2016
Note: The lump sum needed for a modest lifestyle are relatively low due to the fact that the base rate of the age pension (plus various pension supplements) is sufficient to meet the expenditure required at this budget level.
"ASFA figures assume people will retire at 65 and live to their mid-eighties, but that's average life expectancy," says ANZ super and investment product manager Michael Ball.
"Half of us will live longer than 85 so you shouldn't plan for your super to run out at a specific time. You need the comfort of having money in reserve," he adds.
According to 2013 figures from the Australian Bureau of Statistics, most people's super runs out long before their mid-eighties, with 66 per cent of retirees totally reliant on the age pension.
ABS research also shows the average retirement age is actually well short of 65, coming in at 58.5 for men and exactly 50 for women.
Then there's the question of what you personally want in retirement. You may expect more than the ASFA's assessment of a “comfortable” retirement lifestyle, or you may think you could manage on less.
The association does provide income figures for a lower scale “moderate” retirement lifestyle: a yearly income of $34,000 for a couple and just $23,662 for singles.
"That moderate lifestyle is very frugal indeed, your super is basically topping up the current age pension a little. You can largely forget eating out or travelling much. Most Australians want more than this," says Ball.
Nathan Bonarius, a senior consultant at superannuation research firm Rice Warner, thinks younger people will have to aim higher with their super.
“If you're 30 years off retirement there's considerable policy-change risk around the age pension and life expectancy will likely increase to over 90 years old," he warns.
Add those concerns to the assumptions in the ASFA benchmark retirement sums that you won’t be paying rent or a mortgage at 65, which Bonarius says "may no longer be the case with today's higher property prices” – and tacking on a few more hundred thousand dollars to the ideal super figure makes more sense.
“Personally, I think in terms of over that magic $1m figure to fund a good retirement lifestyle in the decades ahead."