On Monday Jeremy Cooper, arguably Australia’s foremost authority on superannuation, threw a cat among the pigeons with a shocking claim: apparently, not even $1 million will buy you anything more than a modest retirement.
This $1 million figure is ludicrously beyond what most Australians can hope to achieve – the average superannuation balance at retirement is just $200,000 for men, and $100,000 for women.
So does that mean Australians must resign themselves to a retirement of penny pinching?
The short answer is, no.
While it makes a good headline, Mr Cooper’s point was a lot more subtle than that. And the way it was (mis)reported missed out two key points.
1. Super is a supplement to the Age Pension, not a replacement
“To say that $1 million is not enough just sends the wrong message to the Australian public,” says Tom Garcia, chief executive of the Australian Institute of Superannuation Trustees.
He says that the superannuation system was “never designed for rich people”, and was always meant to complement the Age Pension, not replace it.
This is reflected in the eligibility threshold. If you and your partner retire with less than $287,000 in savings, you qualify for the full Age Pension. For a single person, you qualify if you retire with less than $202,000. The threshold is even higher if you don’t own your home.
The cut-off point for a part pension, meanwhile, is $776,000 for singles, and $1,151,500 for a couple.
If you and your spouse retire with a joint superannuation balance of $1 million, and have no other assets other than a family home, you still qualify for a part-pension of $226 a fortnight.
In making that calculation, Centrelink estimates that you and your partner will be paying yourselves an income of $1,204 a fortnight (or around $28,896 a year). Ignoring both inflation and interest (a stupid idea, admittedly), on that basis $1 million would last you almost 35 years – or until you are 100 years old.
But there is no stipulation that you spend your superannuation savings so frugally. You can pay yourself whatever you like – $60,000, or $100,000, or $500,000 a year – and still qualify for the extra part pension payment of $226 a fortnight.
Of course, the more you pay yourself early on in retirement, the quicker your money runs out. But when your money runs out, you can then go onto the full Age Pension.
In other words, saving $1 million of super can give you two years of unbridled excess (followed by X years of frugality on the Age Pension), 10 years of comparative opulence, 20 years of comfort, or 35 years of frugal living, just above what you’d get on the Age Pension.
It all comes down, therefore, to how long you think you will live.
2. You’d be crazy to put all your retirement savings in low-interest bonds
Mr Cooper arrived at the $1 million figure by taking pretty much the lowest-risk form of investment: 10-year Australian government bonds, which currently return 2.3 per cent per annum. Given the Age Pension is a 100 per cent guaranteed annuity stream, this was probably a fair way of pricing it.
But according to Equip chief executive Danielle Press, this is not the way to look at superannuation.
“It assumes the only way you can generate an income in retirement is through buying an annuity stream, and that is fundamentally wrong,” she says.
Like most superannuation funds, Equip offers its retired members an ‘account-based pension’ rather than an annuity, which is designed to deliver income and capital growth in retirement.
Equip achieves this in its MyPension product by creating three ‘buckets’. The first is a bucket of cash that is designed to last three years, and from which retirees draw their day-to-day income.
The second – the medium-term bucket – is invested in markets for capital growth, but is also available to provide liquidity for unforeseen spending needs, while the third deals with the possibility that you might live a very long time (‘longevity risk’, in super jargon).
“If you’re retiring at 60, and you’re talking about outliving your life expectancy, that’s a 27-year investment,” says Ms Press. “So why am I concerned about it being invested in cash? I’m not. I’ve got time for markets to recover, I’ve got time to let these things come through.”
Andrew Ward, founder of peer-to-peer investment service SelfWealth, agrees: “It’s not as if you reach the age of 65 and bang, sell all your shares and growth assets.”
Instead, he says you should start retirement on a sliding scale towards conservative assets.
“Right now, you are looking at a minimum 20-year investment timeframe from age 65. That’s still long-term investing. If there was a market crash, you’d have ample time for your assets to recover over a five-10 year period, so you don’t need to rely on cash returns.”
Behind the scenes
The context of Mr Cooper’s article was that of super tax concessions, and the implicit message seemed to be: exercise caution when cutting tax concessions to the rich.
If that is what Mr Cooper was arguing, then he is in a minority. There is growing popular support to end a tax concessions regime that is perceived as massively favouring the wealthy.
According to Industry Super Australia chief executive David Whiteley, the writing is on the wall.
“We’ve reached an inevitability that there will be changes to the taxation system in superannuation, and it’s inevitable that those changes will lead to a more efficient allocation of the tax concessions.”
The aim, he says, is to use tax concessions to get more people off the full pension and onto the part pension, and more people off the part pension altogether.
“That’s logically what either Labor or Liberal governments will be seeking to do.”
However, Mr Whiteley is doubtful there will be any big move in that direction in this year’s budget.