How much super will you actually need for your retirement?


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Don't kid yourself about how much you need in retirement. It is the one time in your life when you need plenty of money.

Retired men can expect to live to 86 and women to 90, longer than previous generations because of medical advances and healthier lifestyles. This means if you stop working at 65 you are likely to need retirement income for at least 21 to 25 years. But half of retirees will live beyond these years.

As you count down the years until retirement, you need to be stockpiling your money for a long and often uncertain future that will be marked by volatile investment markets, inflation, possible health issues, ageing parents and unforeseen expenses. But the biggest unknown is how long you will live.

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But there's no need to panic. Compulsory superannuation has been in place since 1992, so you have been putting some money aside. But most likely you will need to top it up. The lead-up to retirement is a crucial time as your high-earning years become fewer and fewer. Often people realise that they don't have sufficient wealth to support their current lifestyle once they retire.

Make superannuation a priority and have a plan that includes working out how much you will need.

Of course, everyone has different retirement needs. Calculators, available on most fund websites, ask the questions: How much money do you have now? How much are you contributing to superannuation? When are you going to draw money out of your super? When will you retire?

The amount you will need to live on each year will probably vary in each stage of retirement.

For example, new retirees in good health often use much more money in their first years, especially if they go travelling, but as they head towards 80 they slow down and could lower their spending. It is in the final years, when they lose their independence and become frail, that the big costs kick in as they spend much more on healthcare, retirement home living and nursing.

An often-quoted amount needed for retirement comes from the Association of Superannuation Funds of Australia (ASFA). It says a "comfortable" retirement for a couple who own their own home requires $60,063pa and $43,695pa for a single person.

This covers spending on mobile phones, broadband, health insurance, running a car, upgrading a computer, belonging to a gym or social club, a local annual holiday and an occasional international trip. You'll need less for a "moderate" lifestyle.

To fund a comfortable lifestyle ASFA estimates that a couple need around $640,000 in savings and a single person needs $545,000. It assumes that the capital will be drawn down as you age and that you will also rely on the age pension or at least a part pension. The calculation is also based on retirees owning their home outright.

The age pension is a big part of income needs in retirement, with some 70% of retirees on either the full or part age pension.

This is because the average super balance for a 60- to 64-year-old man is $292,510 and for a woman $138,154 at 2013-2014, according to ASFA. Those numbers will increase as the compulsory super system continues to mature and balances compound.

Renters need more

Watch out if you don't own your own home in retirement. Paying rent - particularly if you live in capital cities such as Sydney and Melbourne - means you need a much bigger nest egg.

While single retired homeowners need $545,000 and couples $640,000, single or couple renting retirees in Sydney need about $1,045,000 and $1,166,000 respectively at retirement to reach the ASFA comfortable standard.

One in 12 Australians aged more than 65 live in private rentals, according to ASFA. A further 8% are paying off their mortgage when they turn 65.

Housing affordability is a particularly serious challenge for residents of Sydney: only 65% of them are homeowners by the age of 60 compared with just under 80% for the rest of the country.

ASFA estimates a single retiree renting privately in a one-bedroom unit in Sydney will need to spend $62,434 annually to be comfortable and a couple renting a two-bedroom unit will need to spend $79,801. By comparison, the comfortable retirement annual budget for a homeowner in Sydney is around $43,695 for a single and $60,063 for a couple.

"All estimates assume people are enjoying reasonable health, so any serious illness or disability makes the situation even more challenging, as does rental instability and associated costs," says Martin Fahy, CEO of ASFA.

"Compulsory superannuation contributions at 9.5% fall well short of what is needed to support a comfortable standard of living in retirement for anyone renting privately. Housing affordability and availability is a significant and increasing concern for many Australians and particularly impacts older Australians grappling with the private rental market."

If you want to live rent free in your older years, owning a home should also be a priority throughout your life. It will give you extra equity for retirement. You can unlock capital from your home by selling it and downsizing or moving to a cheaper area.

Or you can borrow against the house through a reverse mortgage or an equity-release debt-free loan. You can also sell it to pay the bond for aged care accommodation. While some nursing homes do not require a bond, as competition heats up for places you are likely to find yourself up against other people with bonds.

Retirement age

When you retire will have a big bearing on how much you need. The often quoted 65 years is not the average retirement age at all. Both men and women retire much earlier. They sometimes have to give up work to look after an ill parent or partner or because their partner retires. Or they are made redundant. The average age for people who have retired in the past five years is 611/2, according to the Australian Bureau of Statistics. Women typically retire at 60 while men quit work at 62.6 years. These figures go against the federal government's expectation that people will work longer.

The problem with leaving the workforce at 60 is that you will not qualify for the age pension, which you can't access until you are 651/2, rising to 67 in 2023.

Your savings will need to fund those five to seven years until you reach pension age. For example, if you retire early and you need $50,000pa for five years, you would have to add another $250,000 to your $400,000 retirement sweet spot savings to collect the age pension at 65.

Others, though, will stay in the workforce longer, whether it's because they can't afford to retire or because they enjoy their job.

The other variable is the value of household assets apart from super. Many experts recommend holding some investments outside super in case the government keeps changing the rules.

And there are plenty of challenges to derail your plans. Divorce can be a devastating and unforeseen event while retrenchment and time spent out of the workforce for a variety of reasons can also throw a spanner in the works.

If you want to leave something behind when you die, you will need to accumulate more assets. Some people are comfortable with using up their assets as they age but others are keen to leave savings and property to children and grandchildren.

Your super investments

Crucial to your plans is what sort of super fund you choose, as its fees and the investment option - for example, balanced, growth or conservative - will also determine the level of your retirement savings. While returns from cash and fixed-interest products are at an all-time low it can be a hard decision.

The dilemma is that safe assets have low yields, whereas more volatile assets such as shares and property provide a relatively healthy income. If retirees are overly concerned about their nest egg's value jumping around and invest conservatively, they will sacrifice significant income and burn through their capital more quickly.

The paradox is that tolerating some volatility in the short term, so as to generate higher yield, is also likely to preserve capital in the long term.

How to catch up?

So do you have enough super to fund your retirement? Be realistic when you work out how much money you will have. If it is not going to be enough, you will need to adjust your retirement plans.

There are a number of options. One is working longer or working part time to ease into retirement. If you own your home, you could unlock some capital and downsize or move to a cheaper area.

But the most effective way to build up your super is to make small sacrifices today so you can enjoy the payoff in the future. There are a number of powerful strategies to rev up your super, including making the right investment choice, salary sacrificing, contributing for your spouse, taking advantage of the government's co-contribution, consolidating your accounts into one and working longer.

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Susan has been a finance journalist for more than 30 years, beginning at the Australian Financial Review before moving to the Sydney Morning Herald. She edited a superannuation magazine, Superfunds, for the Association of Superannuation Funds of Australia, and writes regularly on superannuation and managed funds. She's also author of the best-selling book Women and Money.