Many of us dream of the day we can finally hang up our work boots and retire. In fact, the FIRE movement (Financial Independence Retire Early) is growing in popularity and encouraging people to be smarter with their money in order to achieve this goal.
One thing’s for certain – it is never too early to start planning for the retirement of your dreams. A question we are frequently asked by new clients is how much they will need to have in their superannuation fund to be able to retire? You may even have read articles suggesting a magic number, say $1 million.
In the 20/21 federal budget, a raft of superannuation changes were announced and are set to come into effect in July 2021 which are all built to help people have a healthier super fund so as to retire comfortably.
- The super contribution made by your employer is set to increase from 9.5% to 10%.
- It will be easier for you to bring your super fund with you when you change jobs.
- More transparency by super companies as to how your retirement savings are invested.
- Naming and shaming super funds who are underperforming.
- Changes to the non-concessional transfer balance cap will be lifted to 1.7 million.
While these changes aim to help individuals take more control over their super and retirement lifestyle, the truth is every person’s situation will be different, and the level of savings needed will vary too. Rather than aiming for an arbitrary number, consider the following factors:
Length of time in retirement
One of the biggest unknowns when planning for retirement is the number of years you need to plan for. When compulsory super was introduced in 1992, the average life expectancy in Australia was 77.3 years. Today, most of us can expect to live into our eighties, and life expectancy is forecast to rise to 91 for males and 93 for females by 2050. If you retire at the age of 65, you need to be able to fund your lifestyle for another 20-30 years.
One option to help build up your super balance might be to move to part-time work as you get older. Then you can start to enjoy the benefits of having more time to do what you want, while continuing to make contributions to super for the future.
A big factor to consider when determining how much you need for retirement relates to lifestyle. ASIC’s MoneySmart website suggests that you’ll need two-thirds (67%) of your pre-retirement income, if you own your own home, to maintain the same standard of living in retirement.
The Association of Superannuation Funds of Australia’s Retirement Standard (ASFA Retirement Standard) suggests that single people will need $545,000 in retirement savings, and couples will need $640,000 to have a ‘comfortable’ retirement. This translates to $837 a week for single people and $1,186 per week for couples, assuming retirees draw down all their capital and receive partial Age Pension.
The important factor to consider is whether your version of a ‘comfortable’ lifestyle in retirement aligns with the standard. According to ASFA, a comfortable retirement lifestyle “enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel”1. You may also need to keep some money aside for unexpected costs such as significant medical bills or a decision to help the kids out financially, such as gifting money towards their deposit on a home, these can all impact your retirement goals.
Your living situation plays a big part when determining how much you need to retire. Will you still have a mortgage when you retire, and how do you plan to pay that out? Do you want to downsize or are you looking to upgrade or renovate your house? Will you need to factor rent into your future budget? Thinking about how you want to live in retirement before you get to that stage can make a big difference to your quality of life in your later years.
Of course, your superannuation may not be the only asset you have to rely on in retirement. Other factors to consider when setting your financial goals for retirement include what assets you have inside and outside super, as well as income from sources other than super. You may have assets outside super that you can sell in retirement, or you may decide to downsize your home to help fund your retirement.
The Age Pension is an important source of income for many Australians. It is important to note that the age at which you can qualify for the Age Pension has been slowly increasing from 65 to 67 years. Those people relying on the Age Pension should note that it will increase by 6 months every 2 years until the Age Pension age is 67 on 1 July 2023 . There are also tests around income and assets that might reduce the Age Pension. The maximum basic rate for a single person is currently $860.60 per fortnight, or $1,297.40 per fortnight for a combined couple (not separated due to ill health).
Depending on how your super fund is invested, it may also continue to generate income in retirement. Allocating more of your super funds to cash in retirement reduces the risk of losing money, but also limits the income you can earn. Continuing to invest some of your super savings in growth funds like shares in your retirement increases the potential to generate income or capital growth over time, but it also increases the risk of losing money if the markets drop. It is important to get professional advice on how to invest your super once you have retired, to make sure your financial goals are aligned with your investment strategy and you are not taking on more risk than you are comfortable with.
One of the final factors to consider when setting your retirement goals is whether you want to leave behind a legacy of some kind. This could be in the form of an inheritance for the kids, or a contribution to your favourite charity. Financial advice, coupled with an up to date will, can help make sure your final wishes come to fruition in the future.
Steps you can take to grow your super
There are a number of steps you can take to grow your super in preparation for retirement. For example, we frequently assist clients with multiple super funds to work out how best to consolidate them, so that our clients pay fewer fees but also retain invaluable insurance policies where appropriate. Making extra contributions to super can also make a big difference – paying even small amounts into super from when you are young can add up to thousands of dollars more by retirement age. It is also important to consider how your super is invested, as your investment options can have a big impact on the returns you might expect over time.
Whatever steps you take, it is important to check your super each year to make sure you are on track.
The Tribel financial advisory team can help set you up for a comfortable retirement. We are here to help you work through the different strategies available, to give you confidence that you are on track to meet your lifestyle and financial goals for retirement.