How much super is enough?
This is a smart question to ask early on, because fact is that most people don’t have enough to retire on. But it’s never too late to start.
The most recent AMP Super Adequacy Index, Australia’s largest ever statistical analysis of Australia’s retirement readiness, found that the average annual income in retirement will be $40,567.
As a rule of thumb, most people generally need around 60-65% of their pre-retirement income to live comfortably in retirement. If you have a large expense such as an overseas trip planned for your retirement, then you may need more.
The table below provides an indication of how much money would be required to fund an income of 65% of your pre-retirement income.
Pre-retirement income
|
65% of pre-retirement income
|
Lump sum required1
|
| $30.000 pa |
$19,500 pa |
$254,571 |
| $50,000 pa |
$32,500 pa |
$423,721 |
| $80,000 pa |
$52,000 pa |
$676,701 |
The figures shown in the table above are a great deal higher than the average super balance for those aged 60-64 of $93,0002. This indicates that, on average, many people will face a shortfall in their superannuation, and will need to partially rely on the aged pension to fund their retirement.
To close this gap, you need to make additional contributions. The table below shows the estimated extra super contributions you should make to meet a target retirement income of between 60-65% of pre-retirement income3.
Additional contributions required4
|
Age band
|
Men
|
Women
|
| 25-29 |
8.8% |
9.5% |
| 30-34 |
9.5% |
9.3% |
| 35-39 |
10.1% |
9.3% |
| 40-44 |
11.4% |
10.8% |
| 45-49 |
12.9% |
2.8% |
| 50-54 |
15.3% |
14.1% |
How can I grow my super?
You’ve worked out that you need to contribute extra to your super – that’s a great start! Don’t delay, because the longer you have your money invested in super, the faster it will grow due to the magic of compound interest.
Consider Bob’s example:
At 30, Bob invests $2,000 after tax into his super, each year for 10 years. He leaves his money to earn 7% p.a.
If Bob waits until age 45 and then starts contributing $2,000 pa until age 65 (20 years), he will have contributed twice as much money yet will receive less than half of the earnings.
By starting early, Bob is $57,881 ahead ($31,062 in earnings and $20,000 saved in contributions) thanks to compounding interest.
If you’ve only got a few years until retirement, it’s not too late. You can concentrate on maximising your super benefit now by:
-
increasing the amount you are contributing
-
consolidating your super if you have more than one super plan
-
reviewing the options in which your super is invested.
You should also look at your investment options outside of super, and see if they are in the most tax-effective environment.
1. Based on an AMP Annuity quote at June 2006 for 65 year old male, 20 year nil Residual Capital Value (RCV), nil indexation
2. AMP Superannuation Adequacy Index, July 2007
3. Rice Walker Actuaries commissioned to identify the retirement savings gap for Investment and Financial Services Association Ltd (IFSA). Report released 09/03/06
4. Percentage of aggregate income for each age group needed in extra super contributions to generate an income which is 62.5% of pre-retirement level