How much super do I need?

It may be difficult to comprehend right now, but one day – one glorious day – you won’t have to go to work anymore.

On this page:

  • How much super do I need?
  • Where does my retirement money come from?
  • How much do I need to retire?
  • What should my super balance be at retirement?
  • How much extra should I be contributing to my super?

It may be difficult to comprehend right now, but one day – one glorious day – you won’t have to go to work anymore.

No more waking up at ungodly hours. No more being ordered around by your boss. No more having to be nice to that awful Karen in accounts.

You can literally do whatever you feel like, whenever you feel like it.

The only constraint? Money.

Bowing out of the rat race means you’ll need to have enough cash squirrelled away to last you for a good 20 years or so. This can be a daunting prospect if you’re already having trouble stretching your dollars to last to the end of the pay period.

The good news is that if you start putting extra money aside now, you can maximise your golden years and do everything you never had enough time and/or money to do.

Think of your retirement as the ultimate 20-year holiday that you need to start paying off now.

But saving for anything effectively – whether it’s a car, a house, or even just a new iPhone – entails knowing the total amount you’re saving for. This is doubly so when it comes to retirement. Without knowing much you’ll need in total, you have no way of knowing how much money you need to set aside to reach that goal, or whether your current savings trajectory is adequate.

Where does my retirement money come from?

But first, a quick primer on retirement funds. There are three things you can look at when it comes to saving for retirement: the means-tested age pension, compulsory superannuation savings, and private savings (which consist of voluntary super contributions and other vehicles like property investments, shares, and term deposits).

Sadly, the age pension on its own isn’t enough to live on.This government payment was designed to supplement, rather than replace, the income of retired Australians once they reach the pension age of 65, and it’s means-tested on the assets you have at retirement (bar the house you live in). The maximum age pension rate you can receive is currently only $30 above the poverty line.

Superannuation, on the other hand, is your own bucket of money that’s specifically designed to fund your retirement. The superannuation guarantee is compulsory superannuation that comes from your employers, who are required to contribute at least 9.5 percent of your pay to your super fund (provided you earn $450 or more per month).

Given the superannuation guarantee is based off a percentage of your income, those who work less and/or are on lower salaries don’t fare as well as full-timers who are on the big bucks. This is particularly problematic for women for a multiplicity of reasons.

But you can take advantage of the compounding returns and favourable tax concessions for super by making voluntary contributions out of your own pocket.

How much do I need to retire?

The ASFA Retirement Standard estimates that singles need $545,000 and couples need $640,000 to provide a comfortable standard of living. This is the equivalent of $43,317 per year for singles and $60,977 per year for couples.

You can check how you currently measure up to the ASFA Retirement Standard using the Retirement Planner on the ASIC MoneySmart website. This calculator assumes you’re eligible for the age pension (and hence incorporates both super and age pension payments) and that you will live until the age of 90.

But the ASFA Retirement Standard isn’t applicable for everyone. It assumes you own your home, and hence don’t have to pay rent or a mortgage. It assumes a life expectancy of 85 (which may be undercutting it given the current rate of medical and lifestyle advances), and it also assumes you will retire in reasonably good health.

However, the biggest presumption it makes is defining a comfortable standard of living. According to ASFA, this is when retirees are able to get involved with “a broad range 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.”

Naturally, a comfortable lifestyle for someone on modest means looks drastically different to someone used to the finer things in life.If you’re accustomed to living on a $200,000 income as a couple, then $60,977 is not likely to fit your description of a comfortable lifestyle in retirement– especially now that you have more time for leisurely pursuits.

What should my super balance be at retirement?

The Organisation for Economic Cooperation and Development(OECD) specifies you need around 70 percent of your pre-retirement income in retirement. This assumes you’re paying off a mortgage throughout your working life to the equivalent of 30 percent of your salary, and that the house is paid off by the time you retire.

If you don’t think you’ll own a house by the time you retire, then you can bump the figure back up to 100 percent of your pre-retirement income (assuming that’s the same standard of living you want when you retire).

Let’s look at Mandy, a single 40-year-old. She has a pre-retirement income of $100,000 a year, which means she would need a retirement income stream of $70,000 a year.

To extrapolate that into a total super balance at retirement, she would need to take into account things like inflation and investment returns.

Thankfully, there are a number of online tools that calculate these variables automatically. Industry SuperFunds’ Retirement Needs Calculator is one such tool. Plugging her details in shows Mandy she would need an estimated retirement balance of$1,265,213.

How much extra should I be contributing to my super?

Once you know the total balance you’ll need at retirement, you can figure out how much extra you need to be setting aside to reach that magic number using IndustrySuperFunds’ Retirement Balance Projector.

Plugging in Mandy’s income of $100,000 and current super balance of $75,000, this calculator reveals she will have $520,500 in her super at retirement, which is less than half of her target balance.

By changing the “How much super will you need to live on”figure to $70,000 and specifying “per year”, Mandy will be able to see that her super will run out at age 74. She can input some figures into the after tax and before tax contribution fields to see the difference it makes to her super projections.

Specifying $1,750 per month in after-tax contributions, for instance, will give her exactly the right amount of money to sustain the lifestyle she wants up until the age of 85. This means that in addition to the super contributions her employer makes, Mandy will need to contribute an extra $1,750 per month out of her take-home pay to her super. Note: this calculation assumes that Mandy will continue to work until she retires. If she takes time out of the workforce to care for children or ageing parents (which she’s seven times more likely to do than a man), reduces her hours to part-time, or takes a pay cut, her employer contributions will be reduced accordingly, and she will need to increase her voluntary contributions to reach her target retirement balance.

Bringing it all together

Retirement is decades away for most people, but if you want the freedom to pursue all the things you never had time for throughout your working life, you’ll most likely need to put extra money aside on top of your employer super contributions.
Thanks to the power of compounding returns, starting sooner means you don’t have to save as much every month.

Keen to start making extra contributions to your super? Check out FairVine Super, which offers a variety of innovative savings tools that automate the process ofmaking small but regular contributions.

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All information provided in the magazine is sourced from independent writers & may contain general advice that is not endorsed by the FairVine Super Plan.