How much super do I need to accumuate before I retire?

November 21st, 2012 | Superannuation, Self Managed Superannuation, Retirement, Financial Planning, Investment Advice

You may be nearing retirement, or at this stage of your life it may be a fair way off.  Either way it’s important to plan ahead so that you can afford the retirement lifestyle you desire.  Not sure where to start?  Here’s some thought-provoking advice.

How much super is enough?
Australian employers are required to contribute at least 9% of your salary to superannuation.  But is this enough to live comfortably on in retirement?  To determine the amount of super you will need, think first about your own personal circumstances:

  • Your current age
  • Your current income and assets
  • Your desired retirement age
  • Your desired retirement income
  • Your current superannuation balance

According to the latest research by the Association of Superannuation Funds of Australia Ltd (AFSA), a “comfortable” lifestyle requires approximately $42,000 annually for a single person and $56,000 for a couple.  A “comfortable” budget enables an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of things such as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.  This assumes, of course, that you also own your own home and the mortgage is paid off prior to retirement.

Will compulsory super meet my needs?
Compulsory super is intended to help fund your retirement, however it may not be sufficient to provide you with the lifestyle you want.  Before you decide whether you can rely on compulsory super, consider:

  • The cost of living:  The cost of living will increase in the future due to inflation.  If a car for example costs $30,000 now, in ten years the same car will cost $40,317 (assuming a 3% pa inflation rate)
  • The age pension:  The maximum age pension for a single person is approximately $712 per fortnight, even less if you are a couple.  Could you afford your current lifestyle on this amount?

Life expectancy
Life expectancies have increased significantly.  Men aged 65 can generally expect to live until 81 while women are expected to live even longer to 85.  Your retirement could span 20 years or more, requiring substantial savings to provide for it.

Less time to accumulate super
Compulsory super alone is unlikely to provide for a comfortable retirement.  The Global Financial Crisis has created employment instability and decreased super savings.  Workers are taking more time out to raise their families, gain further education or manage long term illness.  And with the Government decreasing the amount of deductible super contributions you can make each year, the ability to accumulate super is being substantially lessened.

How can I boost my super?
The most cost effective and efficient way to boost your super savings and reach your retirement goals sooner is to borrow to invest within your own Self Managed Super Fund (SMSF), or “gear in super”.  In September 2007 the Government opened the door to gearing within SMSFs, thereby allowing SMSF owners to borrow to invest in a broad range of investments inside a SMSF.

How does gearing in super work?
In a nut shell, you need cash within your SMSF which can then borrow an amount from a lender.  You then use this combined purchasing power to invest in assets, which could be shares, property, managed funds or even art or antiques.  The “beneficial ownership” of the asset is held in trust, giving you (as the trustee) the right to receive income from the asset and the right to make legal ownership through the payment of instalments.  Any income earned by the asset goes into your SMSF which is also responsible for paying the bank interest of the loan.

What are the benefits?

  • Diversification – with more money to invest, you can buy assets you otherwise could not afford.  This can provide diversification benefits to your portfolio.
  • Tax effectiveness – as opposed to gearing outside of super, you can take advantage of the tax effectiveness of the superannuation environment – including the ability to make tax-free withdrawals after age 60.  Interest on the borrowed money is generally tax-deductible too.
  • Your exposure is limited – legally, the loan from the bank must be “limited recourse?” in nature, ie the bank only has rights against the asset purchased with the borrowed money, not your other super or personal assets.

Here at The Quinn Group our experienced team of Financial Planners, Accountants and Lawyers can provide you with the total solution and assist you with all your retirement planning and superannuation needs.  For advice about how much super you need to accumulate for retirement and to get the best chance at the lifestyle you want, contact Peter Quinn by submitting an online enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.

The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it.  It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.