Provided by Mercer: 29/7/08
How far will your 9% Superannuation Guarantee (SG) contribution get you? Will SG alone be enough for a comfortable retirement?
In assessing whether compulsory super alone is adequate to fund your retirement, you need to first consider what a comfortable retirement means to you. One yardstick is the Westpac ASFA Retirement Standard. According to the Standard, a comfortable retirement (enables older, healthy retirees to be involved in a range of leisure and recreational activities etc) requires an annual income of $36,319 for a single and $48,648 for a couple (September 2007). Keep in mind, this is a relatively low standard given most people may need at least 60% to 65% of gross pre-retirement income in retirement.
Secondly, consider a range of details. For example, your current age and super balance; current annual salary; future annual salaries; rate of return on super; whether the Mercer Super Trust has your tax file number; your estimated retirement age and lifespan.
Mind the retirement income gap
The chart below shows the projected super balance at age 60 for a single man and a single woman who are currently age 25, earn $50,000 p.a., have an initial super balance of $0 and rely solely on 9% SG. Also shown is the required super balance for a comfortable lifestyle in retirement as calculated using the Westpac ASFA Standard of $36,319 per year for a single person.
As the chart shows, based on several assumptions (refer below), both the single man and single woman will have significantly less than they need for a comfortable retirement. The man would retire with $268,296 which is $257,003 short of the $525,299 required for a comfortable lifestyle. The single woman would be even worse off, mainly because the calculation excludes employment breaks for raising children. She would retire with $268,296 but would need $599,633 for a comfortable lifestyle because of her longer expected lifespan compared to a male – that’s a shortfall of $331,337.
Assumptions
- 25 years old, earns $50,000 per annum with a 4 percent increase each year
- Plans to retire at age 60, employer contributes 9 percent of salary to super annually
- Required balance for a comfortable retirement (per Westpac ASFA Retirement Standard, September 2007) is $36,319 per annum after tax in retirement, based on Mercer’s interpretation of super and tax laws as at 1 July 2007
- Retirement income increases 3 percent per annum
- Super earns 7 percent before and after retirement each year, after tax and fees
- Single man’s super runs out at age 81, single woman’s runs out at age 85 (current Australian median mortality rates with three year margin added to accommodate mortality improvement)
- No allowance made for super surcharge, voluntary contributions or employment breaks
It’s important to note that some of the income gap may be met if our case studies are entitled to a full or part Age Pension in retirement. Also, note that the amount used in the Westpac ASFA Standard for a comfortable retirement is conservative and a higher income in retirement may be required.
Deciding on a retirement savings goal for your individual situation takes plenty of number crunching and reflection. For financial advice on achieving a stress-free and comfortable retirement, speak with a Mercer financial adviser on 1800 633 403.
Try it yourself
Why not try the Mercer Super Trust Retirement Planner calculator for a guide to your retirement income and savings needs?
This information has been prepared by Mercer (Australia) Pty Ltd ABN 32 005 315 917 for general information only. The information does not take into account your personal objectives, financial situation or needs. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult a licensed or appropriately authorised financial adviser before making any investment decision.
