How much super is enough?
It’s a question with no exact answer. But it is an important question nonetheless, and one you should consider asking yourself from time to time. Just like everyone has different savings and investment habits, everyone has a different lifestyle, meaning the estimate of the amount needed for a comfortable retirement will vary according to the expected lifestyle of the individual or couple.
The Association of Superannuation Funds of Australia (ASFA) provides an industry retirement standard. This estimates how much money you’ll need, depending on your lifestyle. The ASFA estimates that the lump sum needed at retirement to support a comfortable lifestyle is $640,000 for a couple and $545,000 for a single person. This also assumes a partial Age Pension.
Expected costs in retirement:
It may seem obvious, but when someone retires, the majority of his or her income disappears. But the costs remain and may quickly erode super savings and investments. Here are the main costs:
Accommodation costs:
For those who do not own a property, either in full or partially, there will be a constant outflow of rental payments in retirement, but these will no longer be offset by incomes people were once earning during their career. Even if someone partially owns property, remaining interest payments will still fall due on the balance owed on the mortgage, making it so critical for those with a mortgage to minimise this balance as retirement age approaches.
Travel costs:
The idea of retirement is for people to enjoy their twilight years, and many will look to do some travel, assuming travel becomes more of a reality again in the future. But as we know, travel and tourism comes at a price, and the more places one wants to visit, the bigger the expected bill becomes.
Medical costs:
Even those with a clean bill of health will likely face some conditions requiring medical treatment as they approach the later stages of life. While we are very fortunate in Australia to have a universal healthcare in the form of Medicare, there will be certain unavoidable costs that for some may add up faster than others. It is always beneficial to plan on having a bit extra in the kitty to give yourself the best chance of remaining in good health. The bigger one’s super balance, the bigger the buffer for unexpected and unplanned costs.
Factors that may influence how much Super you should try to accumulate each year:
Your Age:
Being young has its advantages 😉. In the case of super, it means you have decades of compounding effect to take advantage of when growing your super balance. Even small amounts contributed in super at a young age will make it considerably easier to reach the target superannuation goals for comfortable retirement than those only starting to focus on this in their later years. Take advantage of your time in the market, versus trying to time the market.
Also be mindful that as the age of someone increases and they approach retirement years, their risk tolerance may change compared to younger people, as they do not want to experience a big drawdown just as they plan to retire. This means that choosing the right portfolio for the right life stage may be important in determining how much to invest in your super, and when.
Your income:
The bigger the income, the bigger the mandatory super contributions from an employer (up to a cap), and the more likely one is able to make voluntary contributions, or at the very least afford to grow assets that may help you at retirement age, like property. This also means that someone with a lower income needs to start contributing earlier to take advantage of compounding to achieve the recommended super balance by retirement age compared to a higher income earner.
Your lifestyle:
It’s not all about keeping up with the Joneses. The question someone really needs to ask themselves is what level of comfort and lifestyle they can afford to maintain once their income reduces or disappears at retirement age. In all likelihood, the better the lifestyle, the more you will need to contribute annually to your super to match how you want to live in your later years.
How to build your super, and avoid eroding your balance
If you decide it is important to build your super, there are some actions that can make a big difference over time. Think about:
- consolidating your super into one account so you pay fewer fees
- making extra contributions to grow your super
- choose the right portfolio for your needs
It is never too early or too late to start. Compounding takes time, and every day you wait to sort out your super is a day less of compounding growth. If you would like to find out about Raiz Invest Super and see how Raiz could help you take control of your future, please click here.
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