Provided by Mercer: 13/3/08
If you suspect you’ll need more than compulsory super to fund retirement, consider your future needs carefully and take action early.
Over the past few years there has been a steady stream of commentary in the public domain about the adequacy of the Superannuation Guarantee (SG) to fund retirement incomes. The Superannuation Guarantee (Administration) Act 1992 came into effect on 1 July of that year to ensure employers provided super support for employees. Originally, SG was set at just 3 per cent of earnings before it was gradually raised to 9 per cent by 2002.
This week, the ACTU Executive voted to pursue a boost to the SG from its current 9 per cent to 12 per cent by 20121. While 9 per cent will probably be inadequate for most Australians, it may be adequate for those with a lower income need and who are eligible for the Age Pension, or those in poor health.
So, how far will your 9 per cent SG get you?
Will 9 per cent SG be enough for a comfortable retirement? What are the main factors to consider when deciding how much money you’ll need to save?
To assess the first question, we need to consider a range of assumptions and details such as: current age and super balance; current annual salary; future annual salaries; rate of return on super; whether the super fund has the member’s tax file number details; estimated retirement age and lifespan.
To assess the second, we need to define ‘comfortable retirement’. One yardstick is the Westpac ASFA Retirement Standard2, which was last updated in September 2007. According to the Standard, a modest lifestyle (better than provided by the Age Pension, but limited to basic activities) for a single is $18,742 per year and $26,339 per year for a couple. A comfortable retirement (enables older, healthy retirees to be involved in a range of leisure and recreational activities) is $36,319 per year for a single and $48,648 per year for a couple. Keep in mind this is a relatively low standard given most people may need at least 60 to 65 per cent of gross pre-retirement income in retirement.3
How far can you go on the Super Guarantee?
Let’s look at how much could be saved on the 9 per cent SG alone. It’s important to note that everyone’s personal and financial circumstances and retirement needs are different so our case study (below) uses a range of assumptions that have been chosen to reflect an average man and an average woman.
The chart below shows the projected super balance at age 60 for a single man and a single woman who are currently age 25, earning $50,000 and with an initial super balance of $0. The chart also shows the required balance for a comfortable lifestyle in retirement as calculated by Mercer using the Westpac ASFA Standard of $36,319 per year for a single.
Assumptions4
- 25 years old, earns $50,000 per annum with a 4 per cent increase each year
- Plans to retire at age 60, employer contributes 9 per cent 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. $36,319 is a conservative amount
and a higher income in retirement may be required.
- Retirement income increases 3 per cent per annum
- Super earns 7 per cent 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
As our case study shows, we estimated that a single man aged 25 who earns $50,000 per annum and relies only on SG, could expect to retire at age 60 with $268,296. However, based on Mercer’s calculations and using the Westpac ASFA Standard for a comfortable life in retirement, they would require $525,299. That’s a super savings gap of $257,003. Using the same assumptions but allowing the lower mortality rates for a single woman, she would need $599,633 - a savings gap of $331,337 – and this does not factor in any employment breaks for raising children. Some of this savings gap may be met if they are entitled to a full or part Age Pension in retirement.
Will you have enough super?
Based on the above, 9 per cent SG is likely to be inadequate for many who seek a comfortable retirement according to the Westpac ASFA Standard. If that sounds like you, you’re not alone. ASFA notes that just 3 per cent of all new retirees in 2006 had $500,000.5
Deciding on a retirement savings goal for your situation takes plenty of number crunching and reflection. At what age do you wish to retire? Will you retire permanently at age 60 or can you work longer until age 65 or even longer? Would you like to phase down your working hours and transition to retirement over several years? How is your health and that of your partner? If you’re used to a living a high income lifestyle, will ASFA’s ‘comfortable’ standard meet your needs or will you need to save more?
A licensed, or appropriately authorised, financial adviser will be able to guide you through these issues and other ones we haven’t even raised (such as any possible impact of using Ordinary Time Earnings on your SG contributions calculations from 1 July 2008). Crucially, a financial adviser can find ways to help you make appropriate voluntary contributions to super and managing other savings with a view to helping close any anticipated retirement savings gap.
More information
- Call 1800 633 403 to speak to a Mercer financial adviser
- Download a fact sheet on contribution strategies to help boost your super
1 The Age, ‘Campaign to ease pressures’, by Ben Schneiders, 5 March 2008, p.5
2 Westpac ASFA Retirement Standard, September 2007, superannuation.asn.au, Accessed 03/03/2008
3 Commonwealth Government Senate Committee, 2003 in ABA Submission to Senate Select Committee – Planning for Retirement, p. 4, bankers.asn.au, Accessed 5 March 2008
4 Source: Mercer Super Trust, Retirement Planner calculator, mercersupertrust.com, Accessed 5 March 2008.
5 ASFA, media release, p.1
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.
