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

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.