Why you only need $275k in super to re­tire

Build­ing up enough super for re­tire­ment may not be as daunt­ing as it seems – you cer­tainly don’t need the of­ten quoted $1 mil­lion. In fact, re­tirees with mod­est sav­ings can be bet­ter off than those with more than twice as much. The se­cret is to hit the “s

Money Magazine Australia - - CON­TENTS - STORY SU­SAN HELY

There is a new dilemma fac­ing Aus­tralians plan­ning for re­tire­ment. For the 80% who fund their re­tire­ment years with a com­bi­na­tion of su­per­an­nu­a­tion and the age pen­sion, the rules in­tro­duced in Jan­uary have some harsh con­se­quences.

Com­bin­ing the age pen­sion with super is harder for home-own­ing cou­ples with su­per­an­nu­a­tion bal­ances be­tween $400,000 and $1 mil­lion. This is be­cause eli­gi­bil­ity ta­pers off quite sharply. There is a no man’s land where your abil­ity to ac­cess the age pen­sion plunges and your su­per­an­nu­a­tion in­come is not high enough to re­place it.

What this means is that if you have mod­est sav­ings you will get the age pen­sion and do much bet­ter than some­one with a lot more in super. For ex­am­ple, a cou­ple who have be­tween $400,000 and $1 mil­lion will be worse off in terms of in­come than a cou­ple with $400,000, be­cause at that point they lose $3 a fort­night in the age pen­sion for ev­ery $1000 above the thresh­old.

The op­ti­mum point – where your su­per­an­nu­a­tion com­bines with the full age pen­sion – is the re­tire­ment sweet spot. The ac­tual amount will come as a pleas­ant sur­prise for both sin­gles and cou­ples who thought their sav­ings were in­ad­e­quate.

The sweet spot is rarely talked about. Fi­nan­cial plan­ners are still com­ing to grips with the im­pli­ca­tions of the new as­sets test. It could be dis­cour­ag­ing for cou­ples who have saved hard to get be­tween $400,000 and $1 mil­lion. The wider im­pli­ca­tions for the whole su­per­an­nu­a­tion sys­tem are un­clear at this stage.

Cer­tainly, re­tire­ment ex­perts typ­i­cally tell you that you need a great deal of money to live well in re­tire­ment. Some say 70% of your pre-re­tire­ment in­come, and $1 mil­lion is fre­quently men­tioned. Oth­ers point to fig­ures that sup­port the As­so­ci­a­tion of Su­per­an­nu­a­tion Funds of Aus­tralia (ASFA) re­tire­ment stan­dard an­nual in­come for a com­fort­able life. It says a cou­ple who are home­own­ers need $640,000 in super ($545,000 for a sin­gle). If you are a renter in Syd­ney, you need sav­ings of $1.16 mil­lion (cou­ple) and $1.04 mil­lion (sin­gle) to pro­vide the in­come to sup­port a com­fort­able life­style.

But the re­al­ity for most peo­ple is that they will never reach those lev­els. The av­er­age super bal­ance for a 60- to 64-yearold man is $148,257 and for a wo­man $123,690 at June 2016, ac­cord­ing to the Aus­tralian Pru­den­tial Reg­u­la­tion Author­ity (APRA). Those num­bers will in­crease as the com­pul­sory super sys­tem con­tin­ues to ma­ture and bal­ances com­pound.

Be­fore Jan­uary 1, an es­ti­mated 325,000 more peo­ple were bet­ter off ac­cu­mu­lat­ing super and com­bin­ing it with the age pen­sion to en­hance their re­tire­ment in­come. But af­ter the changes it is trick­ier to get it right. In fact, there is a point where the more you have, the less you earn.

“It pays to be very poor or to be very rich,” says Steve Greatrex, fi­nan­cial plan­ner and prin­ci­pal of Wealth on Track. “There is a trough in be­tween where it hurts peo­ple who have gone that lit­tle bit ex­tra to save more. It’s a dis­in­cen­tive ef­fec­tively.”

The changes are part of the gov­ern­ment’s push for Aus­tralians to be more self-suf­fi­cient and use their own re­sources. “It wants to dis­cour­age the idea that you can keep your cap­i­tal for­ever and live on gov­ern­ment in­come,” says Greatrex.

Here is how it works. Greg Vaughan, di­rec­tor of Strate­gic In­come, uses the ex­am­ple of a 65-year-old cou­ple who own their home, have saved $400,000 in super and qual­ify for the full age pen­sion. Their to­tal in­come from the age pen­sion ($32,727pa, af­ter some re­duc­tion due to deem­ing of as­set in­come), com­bined with their ac­count-based pen­sion draw­down $20,000, gives a com­bined in­come of $52,727 a year.

Com­pare this with a cou­ple who have sav­ings of $1.05 mil­lion and do not qual­ify for the age pen­sion be­cause their as­sets are too high. They will have a sim­i­lar in­come of $52,500 based on a 5% draw­down of that ac­count-based pen­sion.

So peo­ple with $400,000 will have the same in­come as those who have saved 150% more.

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