Why You Might Not Need $1 Million in Superannuation to Retire

The Australian Institute of Super Funds, and AustralianSuper, say it’s a myth that you need $1 million in superannuation for a comfortable retirement. If you’ve been working towards a lofty target like this, you’ll want to pay attention.

They’ve teamed up with AustralianSuper to help bust this myth — and tell Aussies what’s really going on.

The AIST has just released a paper titled ‘Busting the $1 Million Retirement Myth’. It’s a 20-odd page reality check for those who have been made to feel as if their retirement savings aren’t adequate.

Who’s to blame for the $1 million retirement myth?

The paper says that in general, the media and other public sources are telling Aussies that they need around $1 million for a comfortable retirement. Personally, that’s something I’ve heard a lot of. Not just on TV and online, but from friends and family. It’s a calculation that’s based on average rates of payment for super and other income products. Basically, what commentators have done is to work out how much a single person or couple need each week to live a comfortable lifestyle. Then they’ve worked backwards, using current yield rates, to figure out how much money the couple (or single) would need by retirement.

The AIST’s paper says this figure has been distorted. That it’s been inflated by people and industry bodies who have vested interests in maximising funds under management. In other words, planners and investment managers. The paper says that people are being told they ‘need at least $1 million to retire in comfort. Some financial ‘professionals’ go even further and claim $2 million is a more realistic figure.’

Jeremy Cooper is one of those professionals. He is the head of retirement income at Challenger, a firm that specialises in products like annuities. In April this year, he made waves when he said that even $1 million wouldn’t  be enough for a comfortable retirement. ‘Assumptions and assertions that $500,000 or even $1 million in super, in the current environment, will guarantee a comfortable retirement are suspect,’ said Cooper. He says $1.02 million would only buy a 65 year old couple an income stream roughly the same as the age pension — just over $33,000 per year.

The problem is, as the paper points out, most people don’t get anywhere near $1 million in retirement savings. According to their stats, fewer than 0.5% of members of APRA-regulated funds (not SMSFs) have $1 million or more in super. Most people have more like $100,000.

It’s important to remember that not everybody was saving for their retirement before compulsory super (the Super Guarantee) came into effect in 1992. Based on just compulsory super contributions from ’92 to 2014, a full-time worker on average wages should have around $131,000. But ‘average’ isn’t most people. The average is usually dragged up by that small percentage of people with multi-million dollar balances. Median wages are a better measure of the average Joe (or Josephine). Those on median wages would have about $95,000 by now. And then there’s people on lower wages, or those only working part time. People on lower than median wages (statistically, literally half the population) could have much less.

What the AIST and AustralianSuper don’t want people to do is be discouraged if they’ve got a low super balance. AustralianSuper chief exec Ian Silk says:

The key point for people to appreciate is that even relatively modest super balances can make a meaningful contribution to an adequate retirement income

So rather than despair, workers with $100,000, or even $50,000 in their super accounts should take heart. The super savings they’ve accumulated give them options they might not realise.’

The main thrust of the paper is that most Aussies are forgetting one very important thing when they’re thinking about their retirement income.

What most people forget when they’re calculating how much they’ll need

The first part of busting the $1 million retirement myth is reminding people about the age pension.

Many people forget to add the pension into their calculations. The paper didn’t really cover why that is, except to say that most people don’t understand how super works as a top-up to the pension.

I think it goes deeper than that. Most people are aware that you can have a small income stream and still get an age pension. It’s just that many people hold a deep-seated desire to be self-funded retirees. They don’t want to be seen as leeches, dependent on the state in their old age. Having a self-funded retirement isn’t just an ambition, it’s a matter of dignity.

It takes a lot of mental effort for a person to realise that they will probably have to draw a pension in retirement. Personally, I’m still not there yet. I’d like to believe that by the time I retire, I will own my own home and have enough savings to do whatever I want with the time I have left. Information like that in the AIST’s paper is gradually convincing me otherwise.

AIST CEO Tom Garcia says it’s time that Australians knew what kind of income they could expect in retirement. ‘Super doesn’t exist in a vaccum. Most people approaching retirement will draw an income that is a combination of both super and the Age Pension,’ said Garcia.

At the moment, a couple can have an income of up to $2,881.60 per fortnight, and still receive a part pension. They can have up to $288 income per fortnight and still get the full pension. Between $288 and $2,881.60, their income will be reduced by $0.50 for each dollar over $162.

A home-owning couple can have up to $1,156,500 in assets (not counting their home) and still get a part pension. You can find the other eligibility cut-offs here. To put it simply, there’s a lot of room to build personal wealth and still claim a pension.

The AIST and Australian Super want people to focus on the way super can boost your retirement income, and give you a little extra spending money.

Why even a modest super balance will improve your retirement lifestyle

Silk says that ‘The combination of Age Pension and an income stream taken even from a relatively modest super balance of $100,000 will boost a retiree’s weekly income by $110, enough to meet the modest retirement standard.’

The paper itself phrases it slightly differently — in terms of the income boost, and where the extra money would be applied. A balance of $150,000 would generate a weekly income of about $163, according to the AIST’s calculations. Or $330 per fortnight. That’s 38% more than the age pension alone. And plenty to make up the difference between getting by, and really enjoying life.

According to ABS stats, pensioners and self-funded retirees spend their money in much the same way. The only big differences are in ‘recreation and culture’, and ‘food and non-alcoholic beverages’. In other words, self-funded retirees get to travel and go out more.

AIST spending allocation pensioners and self funded retirees
Source: AIST
[Click to enlarge]

Comparing current income to retirement income also makes a huge difference. According to the AIST’s calculations, a single worker on a median income, receiving 9.5% super though most of their working life, could receive an income of nearly 80% of what they got while they were working.

What struck me the most was the way the age pension and super income combine to push income over the Association of Super Funds Australia (ASFA) ‘modest’ lifestyle requirement.

With a super account balance of less than half that recommended $1 million, a couple could just about live comfortably.

AIST expected retirement income for home-owning couples with combined super of up to $450,000
Source: AIST
[Click to enlarge]

It’s comforting news for those who may have thought they’d spend their retirement just hovering above the poverty line.

How to make your retirement savings work harder

The point of the AIST’s report was that, if you’ve got a low super balance, there’s no need to be down about it.

That’s not to say you shouldn’t do everything you can to maximise your retirement wealth. As you can see from the chart above, thanks to the age pension, every little bit extra helps you live a more comfortable lifestyle. A slightly higher income can go where it counts; on the recreational pursuits that make life more enjoyable.

There’s even more good news for those on median or average incomes. Quite apart from the super system, it doesn’t cost as much as you might think to start building your retirement wealth.

You can build an ‘instant portfolio’ to get you started, from under $3,000.

In ‘5 Things You Can Do in the Next 30 Days to Boost Your Retirement Pot’ — available here for free — investment expert Kris Sayce explains the concept of an instant portfolio. He even suggests a few stocks you may want to consider to get you started. Read this report and you’ll also discover four more things you can do now — not over the coming years, or decades — to boost your retirement pot.

If your super balance is above the examples used by the AIST, hopefully you feel better already. To help boost your retirement income well above the ‘modest’ standard, don’t forget to find out how to download Kris’s free report.

Eva Mellors,
Contributor, Money Morning

Money Morning Australia