Finance Your Super Think you’re financially set to retire? Better check those numbers

Think you’re financially set to retire? Better check those numbers

Its time to think about building a retirement balance now. Photo:Getty
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The big run-up in superannuation values during the recovery from the COVID-19 slump last March has boosted confidence in the super system as a provider of retirement incomes.

But figures on what people actually have invested in super point to the fact that there is considerable overconfidence about what super savings will actually buy in terms of retirement outcomes.

Research from Investment Trends discovered that a record 66.6 per cent of people aged over 40 feel prepared for retirement.

Those who felt ‘very well prepared’ rose to 16 per cent, up from 10 per cent in 2020.

“Another 45 per cent are feeling ‘somewhat prepared’ (up from 36 per cent) and the proportion of pre-retirees concerned about having enough money for extras while in retirement has returned to pre-pandemic levels,” Investment Trends said in a statement.

Are you overconfident?

But there appears to be a disconnect in what people have and what they will actually need.

“Many people think they will have a comfortable retirement but what they actually have may not buy them that,” said David Simon, principal of Integral Private Wealth.

The research found that people believed they would need an average $4,500 per month for a comfortable retirement while they expected to receive $4100 – a 10 per cent gap – down from 37 per cent last year.

Rising confidence resulting from the strong performance of super during the recovery accounts for that narrowing of the expectation gap. How much is enough?

To earn the $4100 per month in retirement most people surveyed aspire to works out at an annual income of $49,200.

A monthly income of $4500 is $54,000 annually.

Both those figures – if applied to a couple – do not buy what the Association of Superannuation Funds of Australia says is necessary to provide for a comfortable retirement.

Even for a single the higher aspirational figure falls short of what ASFA says is a comfortable retirement.

“I would say that $54,000 is not a particularly high income in retirement,” said James McFall, a planner with Yield Financial Planning.

“What are you going to do when you need to upgrade your car or you want to go on a family holiday?”

The ASFA comfortable standard for a single is $45,239 and $63,799 for a couple.

The table above demonstrates the true costs of retirement, and those overheads are way above what most people can save as the expected income rises.

For example, an income of $62,000, virtually what ASFA sees as comfortable for a couple, needs a lump sum of $620,000 to provide 20 years of income with partial reliance on the age pension.

If you want to be totally self funded then you need $1.12 million in the kitty.

While more people might aspire to and expect a certain level of retirement income, the table below suggests that many aren’t going to be able to achieve that.

ASFA figures show that the average super balance for men and women between 30 and 34 is $44,969.

However to achieve a comfortable retirement ASFA recommends savings of $93,000 at that age – more than double what people have actually saved.

For those approaching retirement the situation is much worse.

The median balance for men and women in the 60-64 cohort is $157,932, only 31.3 per cent of the $503,000 ASFA says is necessary at that age to buy a comfortable retirement.

Don’t be gloomy

Not achieving the ASFA standard or better does not mean you are destined for a retirement of penury and disenchantment, however.

“Once people settle into retirement and the get a genuine new understanding of what the incomings and outgoings are, how their investments are holding up and how the age pension can provide the extra support people need, they usually become genuinely comfortable with where they’re at,” Mr McFall said.

Rising balances appear to be giving people confidence that their super will outlive them.

“For the first time in five years, one in two retirees expects their retirement savings will outlast their years in retirement,” Investment Trends found.

“As of September 2021, pre-retirees expect their savings to last on average 22 years, seven years longer than only a year ago.”

Investment Trends did not reveal the number of people it spoke to – and it could be that the optimistic outlook reflects a skew to higher income earners in the survey.

ASFA figures demonstrate the inequality in super balances.

While the median balance for people in the run up to retirement is $157,932, the average balance, a figure skewed by the presence of some large individual balances, is $329,000.

The situation is also expected to improve for younger cohorts as the superannuation guarantee moves to 12 per cent.

“In the last five or 10 years, people have been getting higher levels of superannuation [as the super guarantee has risen] and there have been very high investment returns for superannuation funds,” said Ian Henschke, principal advocate with National Seniors Australia.

However, falling rates of home ownership were eroding retirement potential as people with no home need far higher savings in super to survive during retirement, Mr Henschke said.

The New Daily is owned by Industry Super Holdings