How much superannuation do I need?

In the course of some life planning recently I realised a lot of the most prominent advice on superannuation tends to be guff.

Don’t panic about your superannuation. You probably won’t need as much as you think – 80% of current retirees spend less than ASFA’s “modest” standard, and the current Age Pension mostly covers that.

(That said, long term compound growth investment is terrific, and I encourage you to invest in your super if you can afford it.)

$600k for a single home-owner without government support

When you look around for advice on what superannuation balance to aim for, be aware that most of that advice will come from superannuation funds or wealth managers – each of whom wants you to invest as much as possible.

Lots of advice will focus on the “ASFA comfortable retirement income” standard. ASFA is the Association of Superannuation Funds of Australia, and this level of income used to be called “comfortably affluent”. ASFA’s “modest” standard, by contrast, used to be called “modest but adequate”.

So when you see articles about needing $1 million, $2 million or higher superannuation balances, chill. They’re usually based on the latest industry update to an unrealistically high target.

If you were single, to maintain a modest but adequate lifestyle you would want to retire with an annual income of around $24,000 in 2016 dollars (plus housing costs – more on those below). This is based on ASFA’s “modest” standard, which – like the “comfortable but let’s drop the affluent” standard – was developed by the National Centre for Social and Economic Modelling. NATSEM’s 2004 report for the CPA on the retirement income adequacy [PDF] goes into more detail.

ASIC’s retirement planner estimates that an annual income of $24,000 from the age of 67 to 90 equates to a lump sum of around $600,000 in 2016 dollars – or roughly $1.4 million in 2050 dollars, around the retiring time of someone in their late 20s/early 30s. The equivalent sum for a couple is ~50% higher. (Two people living as a couple don’t cost as much as two people living singly.)

A higher balance will give you a nicer retirement lifestyle, but you don’t need it. A survey released this month [PDF] by the Australian Institute of Superannuation Trustees found that 80 per cent of retirement age households spent less than the ‘modest’ standard of income as defined by the industry – $24,000 dollars per annum.

$1.1 million for a single renter, median house, no government support

Several people have asked me how much renters need. I have no idea what a ‘modest but adequate’ level of housing is, so in lieu of anything better I’ll use median rents. The median rent for a house in metropolitan Melbourne is currently $390/week, or $20k/year. (DTPLI property prices, “Statistics” spreadsheet.) Units go for less.

For reference, median Melbourne house prices are around $528k, and median unit prices around $445k.

If one wanted a ‘modest but adequate’ income of ~$24k/year, plus the $20k/year for rent, ASIC’s calculator suggests a superannuation balance of $1.1 million should suffice. If you’re in a couple, and the two of you can share that median-priced house, you’re looking at $1.4 million (in 2016 dollars).

To (crudely) convert 2016 dollars to 2050 dollars, multiply them by 2.4 – the effect of 35 years of 2.5% inflation.

Everything is easier with government support

The calculations above assume – well, they assume lots of things, but also that you won’t get any government support when you retire. I consider this highly unlikely, but if you’re more pessimistic than I am (or just don’t want to rely on the government), then you can stop reading.

However, if something like today’s Aged Pension were to exist in around 2050 when I’d like to retire, it alone would close to cover the ‘modest but adequate’ $24,000 requirement. A single home owner with as little as $150,000 in superannuation would get around $28,000 yearly from age 67 to 90 (2016 dollars).

A single renter chasing $44,000 yearly would need around $775,000 with the Aged Pension. It’s possible s/he might need less due to governmental rental support or the like, but I don’t know anything about that so I’ve left it out. Ask a professional.

Important caveats

I am not a financial adviser. I simply like numbers and playing around with them. Everything in this post is roughly approximated and certain to be wrong for your specific situation – but it’s probably less wrong than most headlines you’ll read in the paper about superannuation.

Changing assumptions changes the results, and can do a lot. Would you like to live in a cheap unit, rather than a median house? Or a nursing home? What do they cost?

Superannuation is not the only source of wealth or income for people in retirement, and it’s not intended to replace the pension. (At least, not currently.) But what you be able to take away from all this is that if your life means you don’t look like end up with $1 million in superannuation, you’ll probably be alright.

Try to own a house, though.