Make sure you factor in a few what-ifs when you are setting a target for your retirement savings, a leading superannuation specialist advises.
The Association of Superannuation Funds of Australia’s Retirement Standard says that for a “comfortable retirement” you need about $43,244 a year at today’s prices if you are single and $61,061 for a couple.
Graeme Colley, executive manager, SMSF technical and private wealth at SuperConcepts, says it is reasonable to assume that income will be indexed in line with inflation to maintain spending power, say around 3 per cent.
The estimated level of income earned on your retirement savings can be estimated to be around 7 per cent, net of tax, Colley says
A third assumption is that you should target five years beyond life expectancy, to factor in the possibility that you or your partner will live longer.
“The inflation and income assumptions may seem high, given current circumstances, but we are considering a long-term retirement horizon,” Colley says.
Using these assumptions, the savings target is slightly over $1.1 million for a couple to live on $60,000 a year for 40 years.
Colley says that if you start at age 20, you would need to contribute $4700 a year to reach $1.1 million at retirement. If you start at age 50 you would need to contribute $145,000 a year.
“Starting at age 20 means a greater proportion of the final benefit will be earned from income on investments – compounding,” Colley says.
The hardest question to answer is how long your super will last. This will rely on assumptions you use to maintain your standard of living and factors such as market forces or the need to withdraw an unexpected lump sum due to emergencies.
You need to make an estimate of the likelihood and cost of such events, Colley says.
If you assume that after 10 years you need to withdraw $100,000, the amount saved would last for 35 year, not 40.
If you assume that the income earned on the savings will be only 5 per cent a year and not 7 per cent, the money will run out in 25 years.
What these assumptions show is that things can turn out completely differently.
“What you should be doing is reviewing the plan regularly to reduce the risk iof unexpected surprises,” Colley says.