A case study: I’m 53. Is it too late to save for my retirement?

Note: This article is updated every few months with the latest lifestyle/income data and latest Age Pension rates. The most recent data was released in November 2012 (for lifestyle costs up to September 2012), and in September 2012 (for Age Pension rates, which apply until March 2013) This case study was last updated December 2012. Betty has made no plans for retirement, but if she now starts contributing $100 a week, until she retires, then she can expect her lifestyle to be better than her current lifestyle. If she contributes $50 a week, then she can expect to receive 80% of her pre-retirement income.

Q: I am 53 years old. I do not contribute to super and I have never been a saver. I have just paid off my unit. My question is: I earn only $37,000 a year, so I have never had a highly paid job. Is it too late for me to save some money via my work super fund and how much should I be putting into it to make it count? I guess I would still be working for another 10 years.

First, I want to congratulate you on paying off your unit. You may not have realised it but you are better placed than many other Australians of your age because you will be entering retirement free of a mortgage, and presumably you now have surplus money that you can direct to retirement savings.

I can’t stress enough that it is never too late to improve your financial circumstances – at any age. Also, you may not have personally contributed to super but your employer is required to contribute the equivalent of 9% of your salary to your super fund each year, in 4 quarterly payments (and from July 2013 onwards, this percentage will gradually increase to 12%: see article Superannuation Guarantee increases to 12%, eventually).

It’s worth checking how much super you currently have. You may be pleasantly surprised.

Note that anything I write in response to your question is information of a general nature and you will need to do your own research on your financial needs and saving strategies. You can also find some practical information on ‘how much is enough?’ and how to get there in the following articles:

• Retirement planning in six steps
• A comfortable retirement: How much super is enough? (this article is updated regularly with new figures)
• Moving targets: Come on, how much do I really need? (regularly updated) 

Using an example…

I am often asked to illustrate my ‘retirement planning in six steps’’ process using an example. In the past, I have been reluctant to do this in case readers may misconstrue the example as some concrete plan, or ‘advice’ that can be applied to their own circumstances.

My six steps are not the only way to work out your retirement needs but it can be one of many useful tools that can help you with your retirement planning. You can access a lot of free resources, including the excellent financial calculators located on MoneySmart, the consumer website run by the Australian Securities and Investments Commission (ASIC).

I also encourage individuals thinking seriously about retirement to seek tax advice and retirement planning advice. With those provisos, I now illustrate my ‘retirement planning in six steps’.

The story: Say we have a 53-year-old female named Betty. She earns $37,000 a year and her employer contributes 9% Superannuation Guarantee each year of $3,330, paid in quarterly instalments (and that SG contributions will increase from July 2013, until they eventually represent 12% of Betty’s salary). Betty owns her unit outright and she plans to retire at age 65, with the expectation that she will live off the Age Pension and her super savings.

Retirement age: Based on this plan, Betty believes she has 12 years until she retires, although Betty will need to reconsider her retirement date. The Age Pension age is 67 for anyone born on or after 1 Jan 1957 (which applies to Betty), and Age Pension age is between 65.5 years and 66.5 years for anyone born on or after 1 July 1952 and before 1 January 1957. I explain the increase in the Age Pension age in the SuperGuide article Take note: Age Pension increasing to 67 years.

Taking into account Age Pension: Around 80% of retirees receive a full or part Age Pension so Betty can expect her retirement plans to include a substantial Age Pension, if not a full Age Pension. If Betty cannot access the Age Pension until she turns 67, then Betty probably needs to plan for retirement in 14 years’ time rather than 12 years.

Planning can make dreams come true: If Betty is able to make a $100 a week super contribution starting now, until she retires in 14 years’ time, she can expect a lifestyle in retirement until the age of 100, similar (and probably better) to the lifestyle she is enjoying now. If Betty chooses to only make $50 a week in super contributions, she can expect to live on the equivalent of 80% of her pre-tax working income until the age of 87, and possibly longer. Read on to find out how.

Retirement planning in six steps

Steps 1 & 2: What type of lifestyle do you want in retirement, and how much will that retirement cost?

Betty needs to think about the type of lifestyle that she wants, and can afford, when saving for her retirement. The ASFA Retirement Standard indicates that a modest lifestyle for a single person is around $22,500 a year, and a comfortable lifestyle is just over $41,000 a year (see SuperGuide article A comfortable retirement: How much super is enough?). The income figures assume after-tax income, although if an individual holds their money within the super system, no tax is payable on super benefits after the age of 60.

Betty may be hoping to have a lifestyle somewhere between ‘modest’ and ‘comfortable’ – similar to her existing lifestyle of $37,000. Note that in retirement, Betty won’t be paying tax if she keeps her savings in the super system, and will be paying very little tax (if any) if she has her savings outside the super system. For Betty to compare what type of income she needs, to have a similar lifestyle in retirement, she could use many different measures: for example, here are two possible measures:

1. Current after-tax income. On my calculations, Betty’s $37,000 before-tax income translates into an after-tax income of $33,428 (for 2012/2013 year), before taking into account the low income tax offset.
2. 80% of current before-tax income. A common rule-of-thumb is to assume that retirement lifestyle costs are between 65% and 80% of pre-retirement lifestyle costs because there are usually no mortgage payments, no super contributions, and less (or no) tax. Leaning towards the higher end of 80% because Betty’s income is already below the average income, Betty’s target retirement lifestyle income could then be $29,600 – no tax would be payable inside or outside the super system on this level of “total income” if over the age of 65.

Step 3: How much money will you need to finance these levels of income?

Betty’s lifestyle options	Target annual income (in today’s dollars)	Lump sum needed for income for 20 years (67 until 87)	Lump sum needed for income for 33 years (67 until 100)
Age Pension only	$20, 088	N/A	N/A
Modest lifestyle*	$22,539	$37,000 plus full Age Pension	$48,000 plus full Age Pension
Comfortable lifestyle*	$41,090	$370,000 (plus part Age Pension)	$560,000 (plus part Age Pension)
Same after-tax working income	$33, 428	$210,000 (plus part Age Pension)	$310,000 (plus part Age Pension)
80% of before-tax working income	$29,600	$140,000 (plus virtually full Age Pension)	$195,000 (plus virtually full Age Pension)

*ASFA Retirement Standard (www.superannuation.asn.au)

Note: Lump sums in table above are calculated using the MoneySmart Retirement Planner calculator, and assume lump sum is invested during retirement with a return of 7% each year after fees and taxes, and that the annual income is indexed by 3% a year to allow for increases in the cost of living. When the person reaches 87 (see column 3), or 100 (see column 4), the person then relies on the Age Pension only. For further assumptions used in the above table, see assumptions used in the article A comfortable retirement: how much super is enough?

Step 4: Work out how much superannuation and savings that you have now

Betty has paid off her home but her only other source of savings is her super account. Since 2002, her employer has contributed the equivalent of 9% of her salary into her super account (SG) and between 1992 and 2002, her employer’s contributions increased from 3% to 8% of her salary.

Taking an extremely conservative approach, we’ll assume that Betty has $20,000 in super savings, although it’s highly likely her existing super balance would be much larger.

Step 5: Estimate how much super and savings you’re going to have when you retire

If Betty does nothing except turn up for work, her employer must continue contributing 9% SG (and steadily increasing to 12% SG each year by July 2019). Betty uses the ASIC MoneySmart superannuation calculator to work out what her employer contributions (less contributions tax) plus investment earnings will be in 14 years’ time starting from her initial balance of $20,000. When using the MoneySmart calculator, she assumes 7% return after fees and taxes, 3% indexation of salary, $100 life insurance premiums a year, and retiring at age 67. She also uses the same assumptions that appear at the bottom of the table in the SuperGuide article A comfortable retirement: how much super is enough?

According to the MoneySmart superannuation calculator, Betty can expect to have $96,000 in today’s dollars. Today’s dollars means that the calculator has taken into account the effects of cost of living increases and worked out what your account balance would be worth today, which enables Betty to compare lifestyle costs.

Assuming Betty does nothing in terms of retirement planning, but turns up for work, what will that $96,000 in today’s dollars give Betty in terms of an annual income and Age Pension?

Based on the table above, Betty needs just under $50,000 in today’s dollars to live a ‘modest’ lifestyle until the age of 100, in combination with the full Age Pension. Using the MoneySmart retirement planner calculator, Betty’s $96,000 lump sum can deliver her an annual retirement income of $26,600 until the age of 87, or $25,000 until the age of 100, including a substantial part-Age Pension.

Betty is quite excited because doing nothing but turning for work can deliver her $26,600 a year until the age of 87, which works out to be 80% of her after-tax working income. She believes if push came to shove, that she could manage on this level of income, although she would like to aim for a higher income and more comfort in her later years.

Step 6: Take action if a gap exists between how much you want, and what your super and non-super savings are going to deliver.

Betty is pleasantly surprised by her financial position. She didn’t expect that she would be in a position to enjoy a lifestyle better than the Age Pension until at least the age of 100 without taking any deliberate action. Betty is now inspired to improve her expected retirement lifestyle.

Looking at the table above, Betty believes that aiming for a $30,000 a year income in today’s dollars (i.e. 80% of her current pre-tax salary, specifically $29,600) is the most realistic scenario considering her current income of $37,000. She even thinks she may have a better lifestyle in retirement than she does now if she is successful in reaching this target.

Even so, Betty is pragmatic and considers that it is unlikely she’ll reach the lump sum target of $140,000 (until 87, and then reverting to Age Pension only), or $195,000 (until 100).

Betty doesn’t have a lot of spare cash but believes she can contribute $100 a week to her super account, or $5,200 a year. She was contributing $200 a week to her mortgage which is now cleared, so in theory she could contribute $200 a week. Betty however is anticipating that she will need to buy a new car within the next 12 months, and may need the extra cash for the personal loan and deposit.

If Betty makes non-concessional (after-tax) contributions to her super fund, she will also be eligible for the co-contribution – a tax-free super contribution from the Government of up to $500 a year.

Betty uses the MoneySmart retirement planner calculator and discovers that she will have $196,000 when she retires at age 67, giving her a retirement income of $30,000 a year until the age of 100. Betty can’t believe it: she can expect 80% of her current pre-tax salary until the age of 100!

If she opts for the same after-tax working income in retirement ($33,428) then she can expect her savings (plus a substantial part Age Pension) to deliver her the $33,428 in today’s dollars until the age of 85.

Betty is so excited about this news that she thinks that once she pays off her new car in 5 years’ time, she might direct the extra cash (an additional $100 a week) to her retirement savings, and enjoy the higher income for longer in retirement.

With some planning, Betty now believes she is able to achieve a similar (if not better) lifestyle to what she is enjoying now.