Your super – How much is enough to retire?

If life was more straightforward and predictable, we could all pluck figures from optimistic calculations and hope they delivered a ‘comfortable retirement.’

But by the time you get to the age to consider such questions, you’d hopefully appreciate the future is neither knowable nor straightforward, and one size does not fit all.

Another learning is that money does not fix everything, and a good retirement, or indeed life, depends on many other factors such as health and happiness. However, adequate funds have an important place.

There are various figures for the amount needed in super to fund a ‘comfortable retirement. You may find them either reassuring or terrifying, but at least in Australia, there are options.

The benefits and costs to consider

Depending on your assets, excluding the family home, you can access various levels of the aged pension and benefits such as the Seniors Health Card.

But it’s always worthwhile to better understand the kind of money you need in super to provide for that comfortable existence. It may also allow you, if possible, to make any tax-efficient extra concessional contributions to get there.

The first question might be, ‘Do you own your home?’ Housing costs such as rent or mortgages can leave a real dent in your retirement savings and need to be considered.

Another approach involves trying to answer a whole bunch of questions about your world up to 40 years in the future. How much will you want to spend in retirement? How long do you plan on living (God knows)? How much will you earn when you are 65? What will inflation and interest rates be doing then?

These are not simple answers given our brains are not designed to consider next month, much less several decades ahead.

So, how much do you need in Super to retire?

The experts can help to a degree. The Association of Superannuation Funds of Australia ASFA Retirement Standard in June 2021 says 65-year-old couples need to spend $63,352 per year and singles $44,818 to maintain the standard they define as a comfortable retirement.

The amount you need in super to maintain even this standard will vary depending on: the years you will need to the super to fund you in retirement, eligibility for the age pension and the rate of return you get on your savings.

A balance of $1.6 million could generate an annual return of the required $63,000 and indexed to inflation it could last for 30 years. Most households earn less than this tax-free figure so actually may be better off.

Given that the average super balance for men aged 50-54 is around $215,000 and women $157,000 for many couples, there’s a long way to go.

Another approach is to work out living expenses in later years is to allow 70% of your pre-retirement income to fund each year of your retirement.

But how do you work out if you are on track?

The easiest way is to look at your super balance as several months’ (gross) pay. Grab your super Fund statement and your payslip. Divide your super fund balance by your gross monthly income (that is before tax and excluding your super). For example, if your super balance is just $50 000 and you earn an annual salary of $60 000 (or $5 000 per month), your super fund balance represents ten months’ pay.

Here’s what it means in practice:

An unskilled graduate starting out in the workforce might earn a salary of around $50,000.  Each month their employer will pay about $354 (after tax) in super contributions.

Each month the balance also earns an investment return. Over time the contributions and the earnings really add up.

By age 27, the balance should have reached six months’ pay. 5 years later (at 32), the balance should be one years’ pay.

By age 33, the monthly earnings should exceed the monthly contributions. The effect of compounding is becoming visible.

By 40, you should have two years’ pay and five years by 55.

Now try it for yourself. How is your balance?

In summary, the comfort of your retirement will be dependent on factors beyond money, but a firm, secure financial basis will undoubtedly help.

Knowing what will be enough or even sufficient can help you make goals now as to how much to save and make your expectations more realistic.