Many Australians over 50 are concerned about running out of money in retirement, according to a recent report from National Seniors and Challenger. It appears to be triggered by a recent announcement from the Association of Superannuation Funds of Australia that you need a super balance $595,000 to have a comfortable retirement.
The reality is that it's impossible to quantify how much anybody will need when they retire: there is such a multitude of factors in play. Including the state of your health, your life expectancy, your spending habits, how often the kids put their hands out, and what level of age pension may be available to you.
There is also inflation. Suppose you are 50, and decide you will need $70,000 a year in today's dollars to live on if you decide to retire at age 65. If inflation was 2 per cent that would equate to $94,300 a year, but if inflation increased to 4 per cent that figure would leap to $126,000 a year. There's no magic number to aim for.
Remember too that a major plank of our current retirement income system is that at least a part age pension will be available for most retirees. Think about a couple, both aged 70, with $420,000 in superannuation and $30,000 in assets such as furniture and motor vehicles. Their super would be given a deemed value of $286 a fortnight, which is below the $360 a fortnight they can earn before they start to lose some pension under the income test. They are also under the asset test threshold, so would be entitled to a full pension of almost $43,000 a year, indexed.
They could increase that to $68,000 a year by drawing an indexed $25,000 a year from their super. If their super fund continued to earn 7 per cent a year, their money would last to age 98. An income-tested couple can also earn $24,960 a year from employment with no adverse effect on the pension - this could be another way to boost the budget. If they needed more money, their fallback is downsizing to release money from their home.
The key is preparation - so think about ways to maximise the amount of money you will have when you retire. Having a debt-free home makes a huge difference to your retirement resources, and a great strategy once you get to 50, is to switch your focus to maximising your super contributions instead of your loan repayments. A good superannuation fund should be returning 8 per cent - your home loan rate is probably 6 per cent.
In addition, home loan repayments come from after-tax dollars, but superannuation contributions come from pre-tax dollars. Deductible contributions are limited to $27,500 a year from all sources. If you're earning $100,000 a year, your employer should be paying $11,000 a year, which means you can add $16,500 a year in extra tax-deductible contributions. Your contributions would have a 15 per cent entry tax, adding $14,000 a year to boost your super. In contrast, if that $16,500 was in your pay packet, it would be worth only $10,800 after tax.
Doing this means a bigger super balance when you retire. If you still have a home loan then, you could either pay out the loan, or take the mortgage payments from your super fund, leaving a bigger balance to grow. The easiest way to boost your portfolio is to use time.
CASE STUDY: A person who is 60 and earning $100,000 a year will have $500,000 in super if they retire now - but if they can delay their retirement for just five more years their super should be worth $800,000. That's the equivalent of earning an extra $60,000 a year tax-free. And if they can hang on till 70 that super should become $1.2 million. A two-income family can double those numbers, but their costs will be less than double.
The examples above are simple and achievable - it's silly to worry about being broke in retirement. Get the facts instead, and then put strategies in place to make sure your golden years are your best. But don't delay - get time on your side as soon as possible.
- Noel Whittaker is the author of Retirement Made Simple and many other personal finance books. Email: email@example.com