Hit the retirement target
Q I am 51, recently divorced, with adult children who do not live with me. I own and live in a two-bedroom unit in Sydney’s northern suburbs, with no mortgage and no other debts. I have $250,000 in superannuation, $75,000 in a term deposit and $75,000 in shares. I work full time with an annual salary of $60,000 and I have the following “default” insurances within my super: $85,000 death or $85,000 total and permanent disability, and up to $6000 a month income protection for up to two years. I salary sacrifice $1000 a month into my super.
I would like to know whether I have enough insurance, or do I need to increase my cover? I worry that should I become ill or disabled, I won’t have enough income after the income protection insurance runs out in two years.
If all goes well with my health, I would like to work full time until I’m 65, then cut back and work part time (50%) for another five to 10 years. I would like to eventually retire on the same income that I am currently on. Am I on the right track for retirement, or will I need to work full time beyond 65? Should I salary sacrifice more money into super? Or should I divert the $1000 that I am currently putting into my super to another type of investment? I am not comfortable with investing in property. Interesting question, Deb. I would need a couple of pages to answer this fully but I can give you my broad thoughts. Your super fund is a good place to hold insurance but your income protection cutting out after two years is pretty hopeless. Typically, if someone is unwell enough not to work for two years, they are unlikely to ever work again. You have good savings and I would prefer to see you hold a policy that may not pay you for the first few months of an illness or injury but would then pay you to age 65. A longer period before the insurance starts to pay out means lower premiums.
After your salary sacrifice, insurance premiums, tax and so on, I imagine you have around $40,000 to live on. Without considering any aged pension support, you would need about $700,000 to allow you to retire completely at 65 and have the same disposable income that you have today. Given you have some $400,000 now, with your salary sacrifice and employer contributions totalling some $18,000 a year, and the existing money growing in value, I feel you would reach that target by 65. If you work part time for five to 10 years past 65, I really feel you are well on track and are in fact being conservative.
While you are talking to your super fund about your insurance, why don’t you get an adviser it recommends to model your projected position at 65 and beyond? This is quite easily done using a financial planning calculator, or if you prefer you could do this yourself on the free MoneySmart website.