- Using an example…
- Retirement planning in six steps
- Steps 1 & 2: What type of lifestyle do you want in retirement, and how much will that retirement cost?
- Step 3: How much money will you need to finance these levels of income?
- Step 4: Work out how much superannuation and savings that you have now
- Step 5: Estimate how much super and savings you’re going to have when you retire
- 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
- For more information…
Note: This article is updated periodically with the latest lifestyle/income data and latest Age Pension rates. The most recent data was released in December 2017 (for lifestyle costs up to September 2017), and for Age Pension rates, from September 2017. This case study was last updated February 2018.
Q: I am 53 years old. I do not contribute to super and I have never been a saver, but I have had a mortgage. 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 12 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 now required to contribute the equivalent of 9.5% of your wages or salary to your super fund each year, in 4 quarterly payments (and this percentage will gradually increase to 12%: see SuperGuide article Superannuation and employees: 10 facts about your super entitlements).
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:
- 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
Tip: The case study below uses an annual income of $37,000 a year because this is the income based on a question received from a reader. Also, many Australians, especially women, are faced with this income level when entering retirement. An annual income of $37,000 is only slightly above the minimum wage for a working Australian. At the time of writing the minimum wage was $18.69 an hour or $695 for a 38-hour week (which works out to be an annual income of roughly $36,141). If you earn more than $37,000 a year, or expect to live on a retirement income much higher than Beth’s income (see case study below), then you can apply the six steps to your own circumstances, or refer to the articles listed above.
Quick answer: Beth has made no plans for retirement, but by simply continuing to turn up for work, she can expect a retirement income that is 86% ($28,860) of her current after-tax working income ($33,428) until after the age of 92, thanks to her employer’s compulsory super contributions, and the Age Pension. If Beth contributes $50 a week to her super account, then she can expect to receive 95% of her current after-tax working income in retirement, until after the age of 92. If she chooses to contribute $100 a week to her super account, for the next 14 years, then Beth can expect to enjoy the same lifestyle she is enjoying now until after the age of 102, or a better lifestyle than she is enjoying now if she is happy for that income to run out at age 93.
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 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, but doing some research first will ensure you obtain the most cost-effective and suitable advice. With those provisos, I now illustrate my ‘retirement planning in six steps’.
Retirement planning in six steps
The story: Say we have a 53-year-old female named Beth. She earns $37,000 a year and her employer contributes 9.5% Superannuation Guarantee each year of $3,515, paid in quarterly instalments (and that SG contributions will eventually increase until they represent 12% of Beth’s salary). Betty owns her unit outright and she hopes 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, Beth believes she has 12 years until she retires, although Beth 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 Beth), 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 articles Age Pension age increasing to 67 years (not 70 years) and Retirement Age Reckoner: Discover your preservation age and Age Pension age.
Taking into account Age Pension: Around 70% of retirees now receive a full or part Age Pension so Beth can expect her retirement plans to include a substantial Age Pension, if not a full Age Pension. If Beth cannot access the Age Pension until she turns 67, then Beth probably needs to plan for retirement in 14 years’ time rather than 12 years.
Planning can make dreams come true: If Beth does nothing in terms of retirement planning, but continues to turn up for work, she can expect a retirement income that is 86% ($28,860) of her current after-tax working income ($33,428) until after the age of 92, thanks to her employer’s compulsory super contributions, and the Age Pension. If Beth is able to make a $50 a week super contribution starting now, until she retires in 14 years’ time, she can expect a lifestyle in retirement until after the age of 92, similar to the lifestyle she is enjoying now. If Beth chooses to make $100 a week in super contributions, she can expect to live on the same after-tax income as she enjoys now, for 35 years in retirement, until after the age of 102. Or she could choose to live a better lifestyle in retirement, and that lifestyle lasts only until after the age of 92. Read on to find out how.
Steps 1 & 2: What type of lifestyle do you want in retirement, and how much will that retirement cost?
Beth 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 $24,500 a year, and a comfortable lifestyle is just under $44,000 a year (for information on the ASFA figures, see SuperGuide article How much super do you need to retire comfortably?). 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 6, and at lower income levels, income earnt outside the super system would be subject to the Seniors and Pensioners Tax Offset (SAPTO).
Beth may be hoping to have a lifestyle somewhere between ‘modest’, but closer to ‘comfortable’ – similar to her existing income of $37,000. Note that in retirement, Beth 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. SuperGuide has created a ‘median’ income measure, which sits between the ASFA Standard’s modest and comfortable, and this annual income amount is $33,450 a year (for background, see SuperGuide article How much super do you need to retire comfortably?).
Note: The FULL Age Pension for a single person, as annual income, works out to be $22,888.
For Beth 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:
- Current after-tax income.On my calculations, Beth’s $37,000 before-tax income translates into an after-tax income of $33,428 (for 2017/2018 year), after deducting $3,572 of income tax, before taking into account the low income tax offset.
- 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 Beth’s income is already below the average Australian income, Beth’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 Age Pension age.
Step 3: How much money will you need to finance these levels of income?
|Beth’s lifestyle options||Target annual income (in today’s dollars)||Lump sum needed for income for 25 years (67 until age 92)||Lump sum needed for income for 35 years (67 until age 102)|
|Age Pension only||$22,888||N/A||N/A|
|Modest lifestyle*||$24,506||$25,000 (plus FULL Age Pension)||$35,000 (plus FULL Age Pension)|
|Median lifestyle*||$33,450||$215,000 (plus FULL Age Pension)||$296,000 (plus large PART Age Pension)|
|Comfortable lifestyle*||$44,011||$600,000 (plus PART Age Pension)||$895,000 (plus PART Age Pension)|
|Same after-tax working income||$33,428||$210,000 (plus FULL Age Pension)||$288,000 (plus large PART Age Pension)|
|80% of before-tax working income||$29,600||$133,000 (plus FULL Age Pension)||$175,000 (plus FULL Age Pension)|
Note 1: 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 5% 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 retiring at age 67, reaches 93 (see column 3), or reaches 101 (see column 4), the person then relies on the Age Pension only; that is, the super money lasts until the end of age 92, and age 102, respectively. For further assumptions used in the above table, see assumptions used in the SuperGuide article How much super do you need to retire comfortably?
*Note 2: The modest and comfortable lifestyle incomes are sourced from the ASFA Retirement Standard (www.superannuation.asn.au), but the lump sum amounts are calculated by the author using the MoneySmart retirement planner calculator. The median lifestyle, created by SuperGuide, is simply the annual income half-way between comfortable and modest incomes, which enables Australians to compare more realistic income targets, when a ‘comfortable’ retirement is not feasible.
Step 4: Work out how much superannuation and savings that you have now
Beth has paid off her home but her only other source of savings is her super account. Since July 2014, her employer has contributed the equivalent of 9.5% of her wages into her super account. The cash contribution is called Superannuation Guarantee (SG) contributions. Eventually, the SG rate will increaser to 12%.
Background: For the 2013/2014 year, her employer contributed the equivalent of 9.25% of her salary in the form of super contributions to her super fund. 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 Beth has $30,000 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 Beth does nothing except turn up for work, her employer must continue contributing 9.5% SG (and steadily increasing to 12% SG each year by July 2023. Beth 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 $30,000. 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 How much super do you need to retire comfortably?
Note: For this case study, we assume 7% return after fees and taxes, while Beth is saving for retirement, and we assume 5% return after fees and taxes during Beth’s retirement.
According to the MoneySmart superannuation calculator (different calculator to the retirement planner), Betty can expect to have just over $116,000 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 Beth to compare lifestyle costs.
Assuming Beth does nothing in terms of retirement planning, but turns up for work, what will that $116,000 in today’s dollars give Beth in terms of an annual income and Age Pension?
Based on the table above, Beth needs only $35,000 in today’s dollars to live a ‘modest’ lifestyle until after the age of 102, in combination with the FULL Age Pension. Using the MoneySmart retirement planner calculator, Beth’s $116,000 lump sum can deliver her an annual retirement income of $28,860 until after the age of 92, or just over $27,500 until after the age of 102, including a FULL Age Pension.
Beth is quite excited because doing nothing but turning for work can deliver her $28,860 a year until after the age of 92, which works out to be very close to 80% of her after-tax working income ($29,600), and just over 85% of her before-tax 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
Beth 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 after the age of 102, without taking any deliberate action. Beth is now inspired to improve her expected retirement lifestyle.
Looking at the table above, Beth 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.
Beth is optimistic that she’ll reach the lump sum targets for 80% of her current pre-tax salary: $133,000 (until after age 92, and then reverting to Age Pension only), or $175,000 (until after age 102, and then reverting to Age Pension only). See also table above.
Beth is also hopeful that she can reach the lump sum target necessary to deliver her the same after-tax working income of $33,428. The lump sums necessary are $210,000 (until after age 92, and then reverting to Age Pension only), or $288,000 (until after age 102, and then reverting to Age Pension only). See also table above.
Note: 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 (for more information about co-contributions, see SuperGuide article Cashing in on the co-contribution rules (2018/2019 year)).
Beth 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. Beth 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.
Beth is fairly conservative with spending, and likes to have savings to access in emergencies, and wonders if she should contribute only $50 a week, rather than $100 a week. She uses the MoneySmart superannuation calculator and compares contributing $50 a week to her super account as an after-tax (non-concessional) contribution, and contributing $100 a week.
Beth contributes after-tax contributions of $50 per week ($2,600 a year)
Beth uses the MoneySmart superannuation calculator and discovers that if she contributes $50 a week to her super account (in addition to her employer’s contributions) she will have $174,040 when she retires at age 67. Using the MoneySmart retirement planner calculator, Beth discovers that the $174,040 in today’s dollars can deliver her a retirement income of just over $29,600 until after the age of 102 (including nearly a FULL age Pension), or 95% of her current after-tax working income: $31,648 a year until after the age of 93. Beth can’t believe it: she can expect 80% of her current pre-tax salary until after the age of 102, or 95% of her current take-home pay until the age of 93!
Beth contributes after-tax contributions of $100 per week ($5,200 a year)
Beth is so excited about this news that she thinks that even though it will take her 5 years to pay off the new car she plans to purchase, she still might direct additional cash to her retirement savings, and enjoy an even higher income for longer in retirement.
Beth uses the MoneySmart superannuation calculator and discovers that if she contributes $100 a week to her super account (in addition to her employer’s contributions) she will have $223,771 in today’s dollars when she retires at age 67. Using the MoneySmart retirement planner calculator, Betty discovers that the $223,771 in today’s dollars can deliver her a retirement income of $31,368 a year until after the age of 102 (including nearly a FULL age Pension), or $33,855 a year in today’s dollars until after the age of 92.
Beth can’t believe it: she can expect more than her current after-tax income in retirement until after the age of 93!
With some planning, Betty now believes she is able to achieve a similar (if not better) lifestyle to what she is enjoying now.
For more information…
For more case studies, see the following SuperGuide articles:
- A case study: Female, 55 and fearful about retirement plans
- 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