Lily, aged 55, has mixed feelings about her future retirement. She swings between being philosophical or fearful about her financial position, Lily has spent most of her life rearing her children and, until now, worked in low-paid jobs casually and part time before getting divorced later in life. She has $70,000 in super, which she understands will mean that she can get the FULL Age Pension plus a few thousand extra each year from her superannuation savings. Lily is forgetting one important fact. She hasn’t retired yet, which means she still has 12 years of compulsory employer super contributions to be paid into her super account. Lily also now earns $50,000 a year, which means just for turning up for work her employer contributes $4,750 to her super each year.
Lily can expect the following outcomes (also see table and text later in the article):
- By doing nothing but turning up for work, Lily can expect an annual income in retirement of just over $31,000 a year until after the age of 92, or just over $29,000 a year until after the age of 102.
- By doing a lot (making voluntary super contributions of $3,000 a year), Lily can enjoy a retirement income of at least $34,000 a year until after the age of 92 — more than 80% of her after-tax working income ($42,203), and nearly 70% (68%) of her before-tax income ($50,000), or an annual retirement income of just roughly $31,600 a year until after the age of 102.
- By delaying retirement until age 70 (and doing nothing else but turn up for work), Lily can expect an annual retirement income of just under $34,000 a year (indexed) until after the age of 92, and just over $31,300 a year if she wants her money to last until after the age of 102.
Note: In this scenario, delaying retirement by 3 years delivers a similar level of retirement income as making $3,000 in super contributions for 12 years, providing you don’t mind working for 3 extra years.
Key assumptions used in calculations: Annual retirement incomes quoted in this case study are tax-free incomes, and are indexed by 3% each year, to ensure the amounts can be compared in today’s dollars. Investment returns are 7% after fees and taxes while accumulating super, and 5% after fees and taxes while in retirement. The annual income amounts are sourced from super savings and the Age Pension. If you’re aged at least 60 and you retire, you can receive your superannuation benefits tax-free — as a lump sum or as an income stream (with the exception of some public servants). If you are over Age Pension age, you can generally take advantage of more generous tax rules on non-super income, which means you can expect to pay no tax on the annual retirement incomes quoted in this chapter when your sources of income in retirement are from only your super benefits and the Age Pension.
Doing nothing delivers Lily a retirement nest egg of $166,000
By doing nothing except turning up for work, Lily should have $166,000 (see table below) when she retires at age 67 (her Age Pension age). She uses the ASIC MoneySmart retirement planner calculator and finds out that she can receive just under $32,000 a year in today’s dollar as retirement, including nearly a full Age Pension until after the age of 92. After reaching 93 years of age, Lily can then expect to live on the FULL Age Pension only.
If Lily wants her money to last longer, she can drop her annual income to $29,395 a year (including nearly a full Age Pension) and enjoy that level of income until after the age of 102.
Doing a lot gives Lily $34,000 a year, from a $231,000 lump sum
Lily can improve her retirement lifestyle considerably by making her own super contributions. By using the ASIC MoneySmart superannuation and retirement planner calculators, Lily considers the following options:
- Doing a lot — $3,000 a year in after-tax contributions until age 67. If Lily contributes $3,000 a year of her own money as non-concessional (after-tax) contributions each year for the next 12 years, her super balance will be $231,211 (see table below) at the age of 67, giving her just over $34,000 a year (including a FULL Age Pension) in retirement, until after the age of 92, and just over $31,600 a year until after the age of 102.
- Doing heaps — $5,000 a year in after-tax contributions until age 67. If Lily contributes $5,000 a year of her own money, her super balance will be $262,856 (see table below), giving her around $35,500 a year, until after the age of 92, and just over $32,600 a year until after the age of 102, including virtually a FULL Age Pension.
Working longer increases Lily’s retirement income by nearly $4,000 a year
If Lily chose to work an extra 3 years — until age 70, then her employer’s annual $4,750 SG contribution plus her own contributions could mean the following:
- Doing a lot — $3,000 a year in after-tax contributions until age 70. This option delivers a retirement balance of $284,678. Using the ASIC MoneySmart retirement planner calculator, Lily can expect a retirement income of just under $38,000 (including a substantial PART Age Pension) in today’s dollars, from the age of 70 until after the age of 92. If she wants her savings to last until after the age of 102, then Lily can expect an annual income in retirement of just under $34,000 a year (including a substantial part Age Pension).
- Doing heaps — $5,000 a year in after-tax super contributions for 13 years.In this case her super balance could be $326,000, giving her a retirement income of just over $39,000 (including a substantial part Age Pension), until after the age of 92, or an income of just under $35,000 (including a substantial part Age Pension) until after the age of 102.
Note: Delaying retirement by 3 years can deliver a similar level of retirement income as making $3,000 in super contributions for 12 years, providing you don’t mind working for 3 extra years (see table below).
Lily’s super balance and retirement income if she does nothing, a lot or heaps and retires at 67, or retires at 70
|Lily (from age 55)||Balance at age 67||Annual tax-free retirement income||Balance at age 70||Annual tax-free retirement income|
|Super contribution||Until after age 92||Until after age 102||Until after age 92||Until after age 102|
|Non-concessional (after-tax) contributions|
|Doing a little|
|SG + $1000||$199,755||$32,807||$30,581||$243,083||$35,868||$33,281|
|SG + $2000||$215,483||$33,498||$31,106||$263,880||$36,825||$33,325|
|Doing a lot|
|SG + $3000||$231,211||$34,162||$31,606||$284,678||$37,678||$33,932|
|SG + $5000||$262,856||$35,454||$32,637||$326,000||$39,173||$34,915|
Source: This article is an updated and edited extract of a case study from Trish Power’s book Super Freedom: A woman’s guide to superannuation. Reproduced with permission. The figures in the final retirement amount column, and the figures appearing in the annual tax-free retirement income columns, were calculated using the ASIC MoneySmart superannuation calculator and the MoneySmart retirement planner calculator. For the assumptions behind the calculations, see SuperGuide article How much super do you need to retire comfortably?.
For more information…
For more case studies, see the following SuperGuide articles:
- A case study: I’m 53. Is it too late to save for my retirement?
- A case study: Female, 45 and a worry-free financial future
For more information about how much super is enough, see the following SuperGuide articles:
- Financial freedom: Retirement planning in six steps
- How much super do you need to retire comfortably?
- Retirement income: Living on more than $60,000 a year
- How Much Super Is Enough Reckoner
- Retirement income: Come on, how much super do I really need?
- The super challenge: At what age should I retire?
- Understanding your life expectancy
- Age Pension age increasing to 67 years (not 70 years)
- Retirement Age Reckoner: Discover your preservation age and Age Pension age