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Do I really need $1million in super to be able to retire?

Over the years there have been a number of articles published stating people need to have a million dollars or more in super to be able to retire comfortably.

This could be out of the reach for many, if not most Australians.

The real answer to this question is….it depends.

It will depend on several factors including:

1. How much income would I like to receive in retirement?
2. Will my super be my only source of income?
3. Am I entitled to the government age pension?
4. How long will I live?
5. Am I prepared to run down my capital during my lifetime, or do I wish to leave a legacy for the next generation?
6. Do I own my own home, or am I renting?
7. Will I be carrying any debts into retirement?
8. What type of investor am I (conservative, moderate, or aggressive)?
9. Will I need lump sums during my retirement to purchase a new car, renovate the kitchen, or spend on other big-ticket items like overseas holidays?

These are a few of the factors that need to be considered when exploring this question.

Many readers will be aware of the Retirement Standard published by the Association of Superannuation Funds of Australia (ASFA).

First published in 2004, the Retirement Standard provides a detailed budget of the likely costs to support both a modest, and a comfortable lifestyle for Australian retirees. The Standard provides figures for both singles and couples. Furthermore, separate budgets are published for those up to age 85, and those over 85.

Not only does the Standard publish an exhaustive budget for each group, it also provides an estimate of the amount of savings (super) a single person and a couple will need to have to support their preferred lifestyle.

The most recent budget, from March 2022, mentioned for a comfortable lifestyle was $46,494 for a single person and $65,445 for a couple. To support this level of spending, it is estimated a single person will need approximately $545,000 in super, and a couple will need $640,000. It’s anticipated that, at least for part of their retirement, retirees will have their income needs supplemented by the government’s age pension.

ASFA’s projected superannuation balances estimate that the superannuation savings will be exhausted when a person reaches their early 90’s.

The ASFA Retirement Standard has not been without its critics, but up until now it has been the only readily available resource for people wishing to explore the likely costs of living in retirement.

One of the concerns with the ASFA Retirement Standard is it overstates the level of income many people spend in retirement.

Whether this is right or wrong is a question for another day. In the absence of any meaningful alternative, it’s the best we have had to work with. At the end of the day, retirees, and those approaching retirement, will have a gut feel for the level of income they think they will need to support their preferred retirement lifestyle.

Understanding the income, we would like to receive in retirement, is the starting point.

In March 2022, Super Consumers Australia (SCA), an independent, not-for-profit consumer group published a Report “Retirement Spending Levels and Savings Targets”. SCA has partnered with CHOICE.

Like the ASFA Retirement Standard, the SCA report considers retirement spending for singles and couples at a low, medium, and high level. Rather than developing their own budgets, the report relies on spending data available from the Australian Bureau of Statistics.

By comparison, the SCA report suggests the level of income and target savings a homeowning single person and a couple (aged around 67) will need is:

Status Spending Level Spending Savings Required
Single Low $28,000 $70,000
  Medium $37,000 $259,000
  High $50,000 $758,000
Couple Low $40,000 $88,000
  Medium $55,000 $369,000
  High $73,000 $1,021,000

The estimates project the income to be paid through until age 90 and is supplemented by the age pension as it becomes available.

While more research will enable advisers and their clients to make more informed decisions, the issue is an individual one.

We generally have a rough expectation of how much income we would like in retirement.
When that is coupled with other questions around our desire to leave a legacy and importantly, how long that income must last, the amount we need to have saved for our retirement becomes a very fluid number. One size certainly does not fit all.

Planning for retirement is complex and involves many “moving parts”. As most people only get one chance at getting their retirement planning right, the support of a qualified financial adviser is highly recommended.

 

 

Source: Peter Kelly | Centrepoint Alliance

Maximising retirement savings

For most people, superannuation is the “go-to” preferred structure for retirement savings. It is convenient, tax-advantaged and most superannuation funds offer a wide range of investment options enabling their members to structure their savings in a manner they find most comfortable.

However, superannuation has its limitations.

Today, I will deal with one.

Before 1 July 2020, to be able to make a voluntary contribution to super beyond their 65th birthday, a person had to have met a “work test”.

This work test is met when a person is employed or genuinely self-employed for a period of at least 40 hours, worked within a period of 30 consecutive days, in the financial year in which they intend to contribute. Once a person turns 75, even though they may continue to be gainfully employed – as an increasing number are these days – they are unable to make voluntary contributions.

From 1 July 2020, the age limit at which personal contributions can be made without meeting the work test was increased from 65 to 67. This measure was designed, at least in part, to mirror the progressively increasing qualifying age for the age pension.

The age limit for making contributions to super also affects a person’s ability to access the “three-year bring forward rule”.

The three-year bring forward rule applies to personal (non-tax deductible) contributions a person makes to super. These are referred to as non-concessional contributions.

The current annual limit or “cap” on non-concessional contributions is $100,000 per year.

However, provided a person’s total superannuation balance (the total of all money a person has in super at the end of the previous financial year) is less than $1.4m, they can bring forward their non-concessional contributions for the current and next two financial years and make non-concessional contributions of up to $300,000 in a single year. (A person is unable to make any non-concessional contributions if their total superannuation balance exceeds $1.6m).

When a person makes a non-concessional contribution of more than $100,000 in one financial year, they are said to have “triggered” their three-year cap. This means that the maximum they can then contribute over the course of the next two financial years is $300,000, less the amount contributed in the first year.

For example, if a person makes a non-concessional contribution of $170,000 in 2020-21, they have triggered their three-year bring forward cap. The maximum that can then be contributed in 2021-22 and 2022-23 is $130,000 in total.

On the other hand, if they contributed $300,000 in 2020-21, they are unable to make any additional non-concessional contributions until 1 July 2023.

To be able to take advantage of the three-year bring forward rule, a person must be aged 64 or younger at the start of the financial year in which they intend to contribute.

At present, a person may make contributions to super up until they turn 67 without having to meet a work test. However, if a person wishes to maximise their non-concessional contributions by using the three-year bring forward rule, they must have been 64 or younger at the beginning of the financial year.

When seeking to maximise retirement savings through super, timing is critically important.

 

Source: Peter Kelly | Centrepoint Alliance

Compound Interest – the most powerful force in the universe!

When saving for a long-term goal, such as retirement, is it better to save small amounts for a long time, perhaps saving when we cannot afford to, or waiting until later in life and putting larger amounts aside when it is more affordable?

We look at both sides of the debate and put some simple figures together.

Let’s put some ground rules in place:

  • The savings are non-concessional (i.e. after-tax) contributions made to a superannuation fund.
  • The rate of return earned is a net return (i.e. after the deduction of all fees, taxes, and charges).
  • All projections are expressed in 2018 dollars. However, there will be inflation. This can be managed by increasing the amounts saved in line with inflation.

Option 1 – Saving $100 per week for 40 years, earning 5% per annum.

We will start saving $100 per week, from age 25 through to age 65. We earn a conservative 5% per annum on our savings.

According to the ASIC’s Moneysmart Calculator, we would accumulate a total of $661,275 over a 40-year period.

The actual savings contributed, amounts to $208,000 and the earnings component is more than double at $453,275.

Option 2 – Saving $200 per week for 20 years, at 5% per annum.

In this option, we save $200 per week, but don’t start until age 45, also saving through to age 65, and earning 5% per annum.

The amount saved will also be $208,000, however by starting later, the earnings are only $148,229, making a total of $356,229 after 20 years.

To achieve the same outcome as Option 1, we would need to save $371 per week from age 45 for 20 years.

 Option 3 – Saving $100 per week for 40 years, earning 10% per annum.

The total amount saved is still $208,000, however, the total amount saved has jumped to a massive $2,740,434.

Option 4 – Saving $200 per week for 20 years, at 10% per annum.

Sadly, the accumulated savings after 20 years, even at 10% per annum, is a rather paltry $658,120.

So, the jury is in……

Saving a smaller amount for a longer period certainly seems to win out.

 

 

Source:  Peter Kelly | Centrepoint Alliance

Should we be able to access our super to buy a home?

Is it a viable solution to grant early access to super to put towards purchasing a home?

The first thing we need to come to grips with is whether the access to super should be available irrespective of the number of houses people have owned, or whether it should be restricted to first home buyers. Secondly, just how much should we be able to withdraw – 20%, 50%, or all of our super savings?

The most recent version of the discussion talks about allowing a couple of years of compulsory superannuation contributions – the 9.5% superannuation guarantee contributions – to be diverted and used towards a home deposit. The information that I was looking at required an individual to match their superannuation contributions with personal savings on a dollar for dollar basis.

This would at least encourage people to make a concerted effort to save for their home rather than simply rely on their ability to withdraw amounts already in super.

Allowing access to superannuation savings, or providing other cash incentives including first home buyer grants, stamp duty concessions and the like, will simply mean that more money is available to chase the same number of properties. This means, when our first home buyer goes to an auction on Saturday morning, they will have another few thousand dollars more they can bid and so will the other bidders. The highest bidder will win the prize.

I don’t think that throwing more money at the problem is going to make housing any more affordable than it currently is. Perhaps, part of the solution is to seriously examine the supply side of the equation.

I am not necessarily suggesting we should be creating even more housing stock in our capital cities. An increasing focus on regional development, placing some restrictions on the sale of Australian properties to foreign investors, and changing the tax mix in relation to negative gearing and capital gains tax, might be ideas worth considering.

Source: Peter Kelly | Centrepoint Alliance

‘Tap and Go’…is PayWave a help or a hindrance?

These days we don’t need to carry any cash. We can buy almost anything we like simply by swiping our card.

Recently we have seen the developments of apps that allow us to use our smart phone as a device for paying. As convenient as shopping without cash is, it does have its drawbacks.

How often have you looked at your bank account only to see pages and pages of often small debits? The cup of coffee, a sandwich, a magazine or tickets to a movie – they’re all there. And when we look at the remaining balance, we ask ‘where did the money go?’

When we live in a cashless world, it is hard to keep track of our spending. We just spend until there is nothing left.

This becomes a double–edged sword.

For many of us, if we are going to save anything, we save what is left over from the previous pay when our next pay comes in. We should be paying ourselves first – that is transferring our agreed savings before we start spending the remainder.

Of course, when we get to the end of our pay period, there is often nothing left to save anyway. We spend without knowing where the money goes. Sure, there are big ticket items like rent, petrol, insurance, electricity etc. but it is amazing just how much we spend on ‘junk’ without giving it a moment’s thought.

Back in the ‘old days’, we didn’t have the convenience of swiping a card, phone or other devices. And, we didn’t have ATMs!

So how did we manage our cash?

One popular strategy was to have ‘jars’. We were paid in cash which made things a bit easier. Each pay, amounts were allocated to our different jars. We always knew how much was left, and when a jar was empty, we went without.

One of the problems today is a lack of discipline when it comes to spending. It is just so easy to swipe a card.

A couple of months back I found that I was going through my money quite quickly and couldn’t reconcile where it was being spent.

I found that I needed (let’s say) $20 each day for discretionary spending. So, rather than just swiping my card each time I needed something, I got 8 small jars – one labelled for each day of the week, and one called ‘leftover’.

I then put $20 in each of the ‘day jars’. Every morning I took my daily allowance from its jar and put it in my wallet. If there was any money remaining from the previous day, it went into the ‘left-over’ jar.

I know this sounds extremely simplistic, but here’s what I found after a couple of weeks:

  1. Having the physical cash reminded me of how much discretionary spending I have each day.
  2. I am no longer running out of money before the next pay comes in.
  3. I am thinking twice before buying things I don’t really need.
  4. I have money left over at the end of each week, for saving or putting towards larger bills.

Managing cash flow is a significant problem in today’s world. It is not confined to younger people, but is experienced by all generations.

Learning to live within our means will result in a more financially secure future, with the added bonus of less stress.

 

Source:  Peter Kelly | Centrepoint Alliance