It’s a question many Australians have asked themselves since the introduction of mandatory retirement: just how much do I have to have before I retire?
A recent survey by consumer advocacy organization Super Consumers Australia revealed, unsurprisingly, that most Australians expect to maintain their standard of living in retirement.
And the pension system, in which employers are obliged to divert 10.5% of an employee’s salary into a fund, is a great way to ensure a comfortable retirement.
“The retirement pension is a wonderful vehicle,” says David Reed of the Retirement Advice Centre. “It’s like the chassis of a car. This gives you fantastic tax benefits and you pay no income or capital gains tax on your investments in the superannuation ‘chassis’. »
A means-tested old-age pension is available to those who meet the eligibility requirements, and many people depend partly on the government old-age pension and partly on their old-age pension to finance their life after work. .
“Most people want to have the highest standard of living possible, rather than just maximizing their access to old-age pensions,” Reed says.
“Having extra savings on top of what an employer puts into the super will increase a person’s overall income throughout retirement and leave them in a better place overall.”
But how many supers do you really need to retire?
Do you really need a million dollars to retire?
According to a 2021 cost of living survey by news.com.au, nearly a third of Australians believe they need to save a million dollars for retirement. Half think they need at least $750,000.
The good news is that most people won’t need this amount.
“People in the wealth management industry use that number [of one million dollars] a lot, but it doesn’t reflect what the average Australian actually spends in retirement,” says Xavier O’Halloran, director of Super Consumers Australia (SCA).
“Consumers are intimidated by seeing very high numbers and refrain from planning for their retirement, which is not a good result. We also don’t want to see people living on less income than necessary. »
Only high-spending households will need $1 million to maintain their standard of living when they stop working, according to SCA.
Recent SCA research found that a low-income single-family household needs $88,000 by the time they reach retirement age, and a couple needs $111,000. A single person with average expenses requires $301,000 and $402,000 for a couple. A high-spending single household needs $745,000, while a couple needs $1,003,000.
These figures are based on Australia’s average retirement age of 65 and an average life expectancy of 90. It also assumes that retirees fully own their homes.
The good news? Some of us will be richer in retirement
A report by the Grattan Institute accuses the “fear factory of the financial services industry” of perpetuating the myth that Australians are not saving enough for their retirement. Australians often have more than enough. Thanks to wise investments, today’s retirees often die with a nest egg as big as the day they retired.
Additionally, modeling by the Grattan Institute found that today’s average worker can expect retirement income of at least 91% of their pre-retirement income. Low-income Australians may actually have greater financial security in retirement than they have throughout their working lives.
“Many low-income Australians will benefit from a pay rise when they retire because the Age Pension and the income they get from mandatory retirement savings will be higher than what they earned before retirement. retirement,” the report said.
Does it matter if you own your home?
The main caveat to this more positive image of retirement is that it only applies to retirees who own their own homes.
All spending level groups reported positive financial well-being during retirement, according to the SCA survey. Rates of financial hardship were found to be higher among renters, who make up about a third of retirees, according to O’Halloran.
Homeowners can take advantage of the government’s home equity program, which allows them to tap into the equity in their home as income during retirement. It can be used to supplement the old-age pension.
“There are major structural issues around barriers to home ownership and housing affordability in Australia that need to be addressed to ensure that all Australians have a good standard of living in retirement,” says O’Halloran .
It points to the fact that older women are the fastest growing group of homeless people, as they are more likely to take on unpaid care work and be employed in lower paid occupations. The consequence is to accumulate 42% less super than men.
What if you’re worried you won’t have enough?
According to O’Halloran, most people start thinking seriously about planning for retirement in their 50s. A first step is to look at current expenditures to look for areas where savings can be made and put those savings into the super fund.
Either way, O’Halloran believes it’s never too late to start planning for retirement.
“There is always something to do,” he says.
In Reed’s experience, what most people overlook is the need for different strategies when it comes to saving for retirement versus managing expenses during retirement. . He likens it to going up and down a mountain.
“The accumulation phase is when you go higher and try to maximize the amount of your savings. Risks can lead to higher returns,” he says.
“To get down the mountain, you need to minimize those investment risks. You want to slow down your takedowns as you get to land.
How many supers should I have?
This is the eternal question and the one that depends entirely on your expectations for retirement. Do you own your own house? If so, you’ll probably need less retirement time. How much do you want to travel or enjoy luxury? This too will have an impact on how much you will need. The good news is that many Aussies overestimate the amount of super needed to enjoy financial well-being in retirement.
How many supers do I need to retire on $100,000 a year?