How much is enough in super for a comfortable retirement?

One of the most common questions posed by those looking at their superannuation approaching retirement is, “How much is enough to retire?” This week LJ Financial looks through the studies and polls to decipher what will ensure a comfortable retirement.

One of the most important questions that should be assessed before any investment strategy is established, any tax reduction strategies are put in place, or even whether it makes sense to look at getting retirement advice is, “How much do I/we want to live on in retirement?”

A recent global survey conducted by HSBC found that four out of ten retirees in Australia believe they did not prepare adequately for a comfortable retirement. In addition to this, it has been found that just below two thirds of those who qualify for the government pension rely on those payments as their primary source of income rather than their superannuation fund.

How much is enough?

Before considering an absolute figure, a general rule of thumb is to ensure that you are debt free by the time you decide to retire and that you create an environment whereby you are not servicing any repayments. The only exception to this is when you have investment debt that is positively geared eg. A property where the yield generated more than covers the expenses associated with holding the asset.

The Association of Superannuation Funds of Australia recently conducted a study which took into account the following parameters.

1. If you retire at age 65 and your only outgoings were lifestyle expenses.
2. You lived to the average life expectancy of 85.

For a couple to live “modestly” the annual living expenses were approximately $31,500 and to live “comfortably” the annual living expenses are around $55,000 per annum. For a single person “modest” living equates to approximately $22,000 and for a “comfortable” lifestyle $40,300 per year would be adequate.

Depending on who provides you with the information you should conservatively aim for deriving an income per annum of approximately 5% of the value of you investment assets. This is conservative however given that average returns by most superannuation funds in the last ten years around the 4 – 7% mark this seems like a realistic figure. Having considered this, below are approximate lump sum targets retirees should be aiming for to ensure a comfortable retirement.

1. “Comfortable” couple - $1,100,000 in their superannuation funds
2. ”Comfortable” single - $806,000 in his or her superannuation funds

Ultimately it comes down to the lifestyle that you would like to live in retirement, but there are couple of important factors that people should consider. Firstly, the earlier you implement a strategic savings plan the better off and more comfortable you will be in retirement. A financial adviser can take into account all aspects of your personal financial situation, develop a plan and work with you to ensure you reach your retirement savings goals. Secondly, engage and utilise you superannuation. Super is one of the most tax effective structures available to all Australians in retirement as it becomes essentially a tax free environment once you start drawing a pension.

The Federal Election Policy Update; What’s in and What’s Out?

On the 7th of September Tony Abbott’s coalition won the Federal Election. As is the norm, a change in government means a change in legislation. LJ Financial reviews the possible changes to superannuation, taxation and the Future of Financial Advice. 

Taxation Changes
The abolition of the carbon tax was one of the major reforms promised by the coalition. This would not only mean abolishing the carbon tax but also the minerals resource rent tax. Subsequently, the coalition will also be discontinuing the tax loss carry back measure, phasing down of interest tax on financial institutions and the accelerated depreciation for motor vehicles.

Another possible major change is the intended reduction of the company tax rate by 1.5% by July 2015. This however comes with a rather large condition that this 1.5% reduction will be offset by a 1.5% levy on taxable income above $5 million for businesses. This revenue will form part of the paid parental leave scheme.

Superannuation Changes
The coalition has indicated that it may slow down the Superannuation Guarantee increase by 2 years, meaning that the 12% cap will be in force as of 2021/22. This will be facilitated by freezing the current 9.25% rate for an additional 2 years.

The new government is also proposing to scrap the low income earner superannuation contribution. Previously, those who did not earn more than $37,000 p.a would receive 15% their concessional contributions up to $500 as an additional government contribution. This is currently funded by the mining tax so will by all accounts likely be removed as a benefit to low income earners.

The coalition is also looking to improve the method of reporting by the superannuation fund to its members. This initiative is to help members and employers decipher the fees and performance of the fund compared with other superannuation funds.

Other superannuation potential changes fall under the area of the improving corporate governance through aligning the superannuation governance with the standard corporate governance regulations applicable to ASX listed companies, a streamlining the employer superannuation reporting arrangements via a dedicated ATO clearing house and reviews of income stream regulations, contributions caps and the penalties for breaches of contributions caps.

Other Changes
Other possible changes that may occur include the pay parental leave scheme which will entitle a woman’s full replacement of wages for a period of 26 weeks, rather than the current 18 weeks. In addition there are scheduled reforms in relation to aged care and benefits and finally there may be changes to the Future of Financial Advice reforms including the scrapping of the opt-in policy, improving the Best Interests Duty and refining the fee disclosure requirements.

As these are potential reforms are not actual drafted legislative reforms at this stage it is important that people do not act to preempt these changes. That being said it is important that an individual remain informed and educated on these changes particularly in the areas of taxation and superannuation, as those who are engaged in their personal finances, including their superannuation, ultimately end up in a better position in the long run.



Duncan Brown
Private Wealth Adviser