How Much Superannuation Do You Need To Retire?
One question I am asked often, is how much superannuation is needed for retirement.
Unfortunately, I don’t have just one figure for you, as how much superannuation you will need really depends on:
· Your cost of living needed in retirement i.e. What lifestyle you want to live
· How you invest your superannuation i.e. Risk Profile
· You intended wishes for the funds i.e. to grow, remain intact or be drawn down
How to work out your cost of living in retirement
The Association of Superannuation Funds of Australia (ASFA) provides yearly a standard cost of living for a ‘comfortable lifestyle’ and a ‘modest lifestyle’ for both single and couple retirees.
Although using these figures as a guide helps, your cost of living is unique to you and can vary significantly from those figures used above.
These are 3 different methods to start to get an understanding of your cost of living in preparation for retirement.
o The first option is around the tax returns. If you took your taxable income and subtracted the tax payable and any loan repayments (based on the assumption that at retirement you have no debt), you should get a figure that was what had either been saved or spent. If you took out any abnormal items (savings to major expenses), you would have the cost of living.
o The second option is to get an excel copy of all the bank transactions for the last year. You would use this to find out the cost of living expenses by examining the transactions and taking out any abnormal items and then simply adding the columns.
o The third option sometimes used is to get a copy of the latest ASFA detailed budgets breakdown. You would use this as a guide of what expenses you should account for and match off your estimate expenses with what ASFA has on the report. This is a great exercise to review areas you may be spending too much or not enough on.
Hopefully using one or more of these methods you get an understanding of you expected cost of living in retirement.
What risk profile do you need?
The right risk profile for you should consider your investment goals, timeframe, and attitude for risk, helping work out the right balance of risk vs return.
Studies into the determinants of portfolio performance in 1986 found that asset allocation explained, on average, more than 90 per cent of the variation in total return. That is, your risk profile can help determine your expected range of returns.
The below chart shows you that the longer you invest the more predictable the performance outcomes are. Over a 10 year period the range of expected returns narrows, and we can identify what we believe to be the expected long term objective returns of each risk profile.
The portfolio’s that have more risk (growth and high growth) also have the greatest chance for higher long term performance.
You can take the expected long term objective returns of each risk profile and run projections around whether or not these returns, and your balance will meet your cost of living over your life expectancy. You should consider any future eligibility to the age pension to subsidise the income draw from your superannuation.
What do you expect to happen to your superannuation funds in retirement?
We usually find people fall into one of three categories when it comes to their wishes for their superannuation balance:
· People who want it to continue to accumulate
· People who want the balance amount to stay relatively intact
· People who are happy to draw down the portfolio balance over time
Your intentions around what you wish to happen to the portfolio will drive how much you will need to have in your superannuation in retirement. You will need a much greater balance if your intentions are for your superannuation to continue to grow or remain relatively intact compared to drawing down the balance over time.
Next steps
If you feel you are not on track to meeting your desired superannuation target, or need further assistance understanding what your target amount should be, feel free to reach out to one of our trusted advisers who can assist you on your retirement planning journey.
This information is of a general nature only and has been provided without taking account of your objectives, financial situation or needs. Because of this, you should consider whether the information is appropriate considering your particular objectives, financial situation and needs.
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