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Do I really need $1million in super to be able to retire?

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Over the years there have been a number of articles published stating people need to have a million dollars or more in super to be able to retire comfortably.

This could be out of the reach for many, if not most Australians.

The real answer to this question is….it depends.

It will depend on several factors including:

1. How much income would I like to receive in retirement?
2. Will my super be my only source of income?
3. Am I entitled to the government age pension?
4. How long will I live?
5. Am I prepared to run down my capital during my lifetime, or do I wish to leave a legacy for the next generation?
6. Do I own my own home, or am I renting?
7. Will I be carrying any debts into retirement?
8. What type of investor am I (conservative, moderate, or aggressive)?
9. Will I need lump sums during my retirement to purchase a new car, renovate the kitchen, or spend on other big-ticket items like overseas holidays?

These are a few of the factors that need to be considered when exploring this question.

Many readers will be aware of the Retirement Standard published by the Association of Superannuation Funds of Australia (ASFA).

First published in 2004, the Retirement Standard provides a detailed budget of the likely costs to support both a modest, and a comfortable lifestyle for Australian retirees. The Standard provides figures for both singles and couples. Furthermore, separate budgets are published for those up to age 85, and those over 85.

Not only does the Standard publish an exhaustive budget for each group, it also provides an estimate of the amount of savings (super) a single person and a couple will need to have to support their preferred lifestyle.

The most recent budget, from March 2022, mentioned for a comfortable lifestyle was $46,494 for a single person and $65,445 for a couple. To support this level of spending, it is estimated a single person will need approximately $545,000 in super, and a couple will need $640,000. It’s anticipated that, at least for part of their retirement, retirees will have their income needs supplemented by the government’s age pension.

ASFA’s projected superannuation balances estimate that the superannuation savings will be exhausted when a person reaches their early 90’s.

The ASFA Retirement Standard has not been without its critics, but up until now it has been the only readily available resource for people wishing to explore the likely costs of living in retirement.

One of the concerns with the ASFA Retirement Standard is it overstates the level of income many people spend in retirement.

Whether this is right or wrong is a question for another day. In the absence of any meaningful alternative, it’s the best we have had to work with. At the end of the day, retirees, and those approaching retirement, will have a gut feel for the level of income they think they will need to support their preferred retirement lifestyle.

Understanding the income, we would like to receive in retirement, is the starting point.

In March 2022, Super Consumers Australia (SCA), an independent, not-for-profit consumer group published a Report “Retirement Spending Levels and Savings Targets”. SCA has partnered with CHOICE.

Like the ASFA Retirement Standard, the SCA report considers retirement spending for singles and couples at a low, medium, and high level. Rather than developing their own budgets, the report relies on spending data available from the Australian Bureau of Statistics.

By comparison, the SCA report suggests the level of income and target savings a homeowning single person and a couple (aged around 67) will need is:

Status Spending Level Spending Savings Required
Single Low $28,000 $70,000
  Medium $37,000 $259,000
  High $50,000 $758,000
Couple Low $40,000 $88,000
  Medium $55,000 $369,000
  High $73,000 $1,021,000

The estimates project the income to be paid through until age 90 and is supplemented by the age pension as it becomes available.

While more research will enable advisers and their clients to make more informed decisions, the issue is an individual one.

We generally have a rough expectation of how much income we would like in retirement.
When that is coupled with other questions around our desire to leave a legacy and importantly, how long that income must last, the amount we need to have saved for our retirement becomes a very fluid number. One size certainly does not fit all.

Planning for retirement is complex and involves many “moving parts”. As most people only get one chance at getting their retirement planning right, the support of a qualified financial adviser is highly recommended.

 

 

Source: Peter Kelly | Centrepoint Alliance

Are Downsizer Contributions achieving their purpose?

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In 2017 the Government announced an initiative designed to reduce the pressure on housing affordability for Australian families.

The initiative, which came into effect on 1 July 2018, focussed on allowing older Australians – those aged 65 or over – to contribute up to $300,000 (and up to $600,000 for a couple) of the proceeds from the sale of an “eligible dwelling” to superannuation without being constrained by the usual age limit, work test, and contribution cap restrictions.

Downsizer contributions, as they are known, are subject to several conditions including a requirement the home must have been the owner’s main residence for at least part of the time, and the home must have been owned for at least 10 years.

Since downsizer contributions first became available in July 2018, approx. $9.4bn has been channelled into the superannuation system.

One of the eligibility criteria for making a downsizer contribution is the requirement a person must be aged 65 or older at the time they make their contribution. In the 2021 Federal Budget, the Government announced plans to reduce this to 60 from 1 July 2022. This change has been legislated.

While the ability for older Australians to contribute surplus proceeds from the sale of their former home to superannuation appears to have been a popular strategy, at least based on the number of technical enquiries we receive from financial advisers, I am not convinced the strategy has fulfilled its intended purpose of making housing more affordable.

When first introduced, the assumption was that older Australians were living in large homes close to the city. These were homes that these same older Australians had raised their own families in and were now occupied by one or two people. The ability to sell the family home and purchase something a little cheaper and contribute surplus proceeds to superannuation seemed like a good idea at the time.

However, since 2018 Australia has seen a massive increase in the value of the residential real estate, not only in capital cities but also in regional areas.

Australian housing prices have been driven by several factors with the largest no doubt being historic low-interest rates, readily available credit, and a raft of other state and federal government initiatives.

While the downsizer contribution initiative presents a wonderful opportunity for older Australians to get more money into super to help fund their retirement income needs, I doubt it has achieved its purpose of making housing more affordable.

Selling a family home is often more of an emotional decision rather than one purely driven by financial reasons. Family homes come with years of memories and are often located close to services, facilities, and established networks of friends and family.

If a decision is made to sell the family home, the ability to make a downsizer contribution may be a bonus. But it should not be the primary driver.

 

Source: Peter Kelly | Centrepoint Alliance

How many super accounts should I have?

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As at May 2021, the Association of Superannuation Funds of Australia (AFSA) stated there were 24.4 million individual superannuation accounts held by Australians.

Every time we change jobs, and our new employer asks for our superannuation fund details so they can make compulsory contributions. If we don’t have those details at hand, our new employer will make contributions to their “default” fund, thereby resulting in a new account being opened.

As a result, many Australians have ended up with multiple, often small superannuation accounts. Sadly, these account balances are eroded over time to a point where, after fees, charges, and insurance premiums are deducted, nothing is left and the account is closed.

There will be occasions where having more than one superannuation account will be intentional. Where an individual wishes to:

• hold stand-alone insurance through super,
• segregate their taxable and tax-free components for estate planning purposes,
• draw a pension while also continuing to contribute, or
• hold money in the superannuation system even though they have reached their transfer balance cap, maintaining multiple superannuation accounts will be appropriate.

One of the inherent risks of having multiple superannuation accounts is the risk the accounts will become “lost”.

Just imagine, you have multiple superannuation accounts with different super funds opened because you have changed jobs a few times. You then move house and forget to advise your various superannuation funds of your new address. As a result, your super funds lose contact with you.

When a super fund has a lost member, they are required to transfer the lost account to the Australian Taxation Office (ATO). The ATO will then attempt to reunite the lost member with their lost superannuation.

The government-run campaign of reuniting members with their lost super has been quite successful, with around 13 million duplicate accounts having been closed or consolidated, over the course of the past few years.

However, there are still many duplicate accounts in existence. Having multiple accounts can result in duplication of fees and charges.

Looking for lost super and consolidating multiple accounts can be done quite simply by checking the superannuation tab in your MyGov account.

Before consolidating super it is important to speak with your financial adviser to ensure consolidation is in your best interest. Importantly, consolidating super may result in the loss of valuable insurance cover.

 

 

Source: Peter Kelly | Centrepoint Alliance

Compulsory super – a bit of a problem child?

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The current debate is whether compulsory employer superannuation contributions (generally referred to as “super guarantee” or “SG”) should be increased from 1 July 2021 or be deferred or possibly even suspended.

Back in the mid-1980s compulsory super was first introduced as trade-off for a national wage increase. It was referred to as award super, and required employers to contribute 3%, starting at 1%, of a person’s salary or wage to a superannuation fund.

By June 1988, just on half of all employees were receiving superannuation from their employer.

The Labor Government introduced SG legislation that commenced on 1 July 1992. The rate of SG contributions would progressively increase from 3% to 9% between 1992 and 2002.

By November 1993, 80% of employed people were making super contributions, or had them made (by an employer) for them. In many ways, SG had become “almost” universal for employees.

At one point, back in the 1990s the Keating Labor Government proposed supplementing SG contributions with a compulsory employee contribution starting at 1% and increasing to 3% by 1999-2000. This idea was abandoned when the Howard Liberal Government took office in 1996.

In 2010, in response to the Henry Review, the Coalition Government proposed increasing the rate of SG to 12% by 2019-20. This was legislated, however the dates have been tweaked along the way as successive governments of both persuasions have played with the system. The SG rate is not due to increase to 12% until 1 July 2025.

Where are we today?
The SG rate is due to increase from the current 9.5% to 10% from 1 July 2021.

However, as many businesses suffered following the lockdowns imposed by the outbreak of COVID-19 in early 2020, many are arguing that increasing the SG rate to 10% from 1 July 2021 is a step too far in the current economic environment. Any discussions by our political leaders on deferring the July increase has become highly politically charged. One of the major critics of any deferral is the superannuation sector which makes its money from the inflow of superannuation contributions.

What to expect?
As things presently stand, the government can go one of two ways.

They can either stick with the scheduled increase to 10% from 1 July 2021 – after all that is enshrined in legislation – or they can introduce an amendment to defer the next, and possibly future increases. However, if seeking to table amending legislation, the government may not have the numbers to support a deferment.

At this stage, I suspect we will hear more about this as we approach the Federal Budget which is expected to be delivered on 11 May 2021.

If you are looking to maximise your retirement savings, consider seeking the advice of a qualified financial planner.

 

Source: Peter Kelly | Centrepoint Alliance

How much is my super really worth?

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What is your super worth? Are you tempted to check your account balance on a regular basis?

This information is now available 24/7. We can log into our super fund account at any time and find out our account balance at the end of the previous business day.

Having said that, not all super funds are the same, and there lies a problem.

For the purpose of this article, we need to distinguish between two main types of super funds; retail super funds, and industry superannuation funds.

Retail superannuation funds are often products offered by large financial institutions including banks, while industry funds are often described as being not-for-profit, or profit-for-members funds.

Retail superannuation funds will generally be “marked to market”.

This means the value of the fund’s assets, and therefore the balance of each member’s account, are valued daily. The balance you see when you log into your account is what you would have received if you withdraw your funds at the end of the previous day. Where a superannuation fund invests in listed assets (shares, property trusts, fixed interest securities and cash) valuing the assets each day is relatively easy.

However, if a superannuation funds invests in a significant portion of assets that are not listed on an active secondary market, like a stock exchange, valuing assets on a daily basis becomes more challenging. In fact, some super funds with significant portfolios of unlisted assets, including direct property, may only value their assets once a year. This helps to smooth out account balance volatility.

When our super is held in a retail superannuation fund, the daily fluctuations in our account balance might appear concerning. After all, the fund is revaluing its billions of dollars of assets every day and a small increase or fall in (say) the US Dow Jones index can have a flow on effect to the Australian stock exchange. This in turn, translates to a positive or negative movement in our account balance.

One of the risks that occurs when our super fund invests in marketable securities like shares, fixed interest, and listed and unlisted property is that we experience this volatility. If our super fund values a significant portion of its assets less regularly, we will not see the same volatility.

However, if your super balance today is (say) $300,000, but a couple of months ago it was $330,000, does this mean you have lost $30,000? No, unless you have crystalised your loss if you sell or switch out of a particular asset or asset class.

One of the real risks to our superannuation savings is that we sell assets when the prices fall, rather than riding out the storm.

While some superannuation funds may appear, at least on the surface, to be less volatile than other superannuation funds, it is of absolute importance to ensure you are comparing like with like. If one fund is valuing its investments on a daily basis but another fund is valuing their investments less frequently, the second fund may appear to be less volatile. However, you need to look beyond the headline performance and consider other aspects including what types of investments the funds hold, the fees they charge, how frequently they value their assets, and how the funds perform over a one, two, five and ten year period.

Perhaps we should resist the temptation to check our account balance every day, or even every week unless we are actively managing our own portfolio (which most people don’t).

Imagine if we asked our real estate agent to value our home every day. While we may loosely keep track of real estate prices in our local area, we are generally only concerned about the “real” value when it comes time to selling.

If at the end of the day, the volatility of your super is causing concern and sleepless nights, perhaps it is time to review your overall investment objectives and consider moving to a more conservative investment mix.

If you need specific advice tailored to your own circumstances, we always recommend you consider seeking advice from a licensed financial planner.

 

Source: Peter Kelly | Centrepoint Alliance