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Whether you’re just starting out in the workforce or well into your working life, something almost everyone will want to know at some stage is whether their super balance is on track to fund a decent standard of living in retirement.
‘Have I accumulated enough super for my age or is there some catching up to do?’
To help answer this question SuperGuide has put together a simple reckoner of the amount of super the average income earner would currently need to have built up in order to generate a defined level of income in retirement.
Target retirement income
To find out if your balance is on track, the first step is to estimate the income you want to have in retirement. So how do you do that?
There is no ‘one size fits all’ answer to retirement income needs – what is enough for you might seem extravagant to someone else, but we can look at some useful rules of thumb to begin answering this question.
Standardised retirement budgets
One of the more widely used benchmarks of retirement income adequacy in Australia is the ASFA Retirement Standard. Published by the Association of Superannuation Funds of Australia (ASFA) since 2004, the Retirement Standard uses a comprehensive budget to estimate the annual amount an individual or couple needs to afford either a modest or comfortable retirement.
The ASFA Retirement Standards for those aged 65 to 84 are currently as follows:
| ASFA Retirement Standard | Single (per year) | Couple (per year) |
|---|---|---|
| Modest lifestyle | $30,582 | $44,034 |
| Comfortable lifestyle | $48,266 | $68,014 |
Source: ASFA (September quarter 2022)
The comfortable budget includes daily essentials, as well as private health insurance, a range of exercise and leisure activities, and the occasional restaurant meal. As far as travel, an annual domestic holiday and an international holiday once every seven years are budgeted for.
The modest budget generally involves less spending across all key household expenditure areas, with no provision made for either vitamins and other over the counter medicines, or overseas holidays.
Income replacement method
Rather than using the concept of household budgets and applying them to people with differing income levels and household expenses, other experts, including the Actuaries Institute Australia, prefer to use a percentage of working life income as a measure of retirement income needs. This method recognises that people who have higher income during their working lives tend to expect a correspondingly higher income in retirement to maintain their relative standard of living.
According to the Actuaries Institute, 65–75% of pre-retirement income is adequate for most people. The replacement rate is less than 100% because your income needs change in retirement – you no longer need to save, will likely have lower housing costs (assuming you own a home and have repaid your mortgage prior to retiring), retirement income from super is tax free and you don’t generally have children to support.
If you’re a very high or very low income earner you may need to use a different replacement rate for your income. Those with a very low income usually need closer to 80–90% of pre-retirement income to maintain a reasonable standard of living because non-discretionary household expenses such as food, utilities and housing tend to consume a higher percentage of total household income. Conversely, very high earners may be happy with significantly less than 65% of the income earned while working.
Super tip for renters – adjust your target
If you will be renting in retirement the picture can change significantly. Both the ASFA Retirement Standard and the 65–75% income replacement rate guide assume you own a home by the time you retire.
The government’s Retirement Income Review, which was released in November 2020, found that renters over the age of 55 spend 25–30% of their income on housing costs, while homeowners spend only 5–10%. The review also found financial stress generally declines as people approach and enter retirement, but this is not true for renters.
About one-quarter of retirees who rent privately are in financial stress, primarily because of high housing costs. It is reasonable to estimate that a person who rents in retirement may need up to 25% more annual income than a homeowner retiree to achieve the same relative lifestyle.
Required current super balance by age for a ‘comfortable’ retirement
SuperGuide has compiled a simple reckoner below that you can use to see the estimated balance today that would be required, across a selection of ages, for an average income earner to generate a ‘comfortable’ income in retirement, as indicated by the ASFA Retirement Standard.
The reckoner uses output from ASIC’s MoneySmart retirement planner, calculated for the average Australian full-time employee currently earning $92,000 per year.
The retirement age for the reckoner has been set to 67 and the calculations include standard superannuation guarantee (SG) contributions from an employer. It is assumed retirement income will be generated from some combination of super pensions (such as an account-based pension) and the Age Pension where eligible. Assets outside super are not considered.
In the couple scenarios, both partners are assumed to be the same age, with one partner earning the average full-time wage of $92,000 per year and the other earning $55,200 per year, which is equivalent to working three days a week at the same salary level. The required balance shown below is the combined amount needed to reach the retirement goal (that is, the current sum of the couple’s individual balances).
| Age | Current required balance (single) | Current required balance (couple combined) |
|---|---|---|
| 30 | $127,500 | $89,000 |
| 35 | $182,000 | $161,000 |
| 40 | $242,000 | $238,000 |
| 45 | $306,000 | $318,000 |
| 50 | $375,000 | $403,000 |
| 55 | $447,000 | $490,000 |
| 60 | $520,000 | $574,000 |
How to interpret the results
For a single person, our simple reckoner is trying to provide an answer to the question: “If I am a certain age and receiving Super Guarantee employer contributions based on earning the current full-time average wage, how much should I have in super at present, roughly speaking, if my aim is to retire at age 67 and have an income broadly equal to the current ASFA comfortable Retirement Standard?”
In the case of couples, the above changes to reflect one member earning the average wage while the other earns two thirds of it.
Of course, it is likely that your circumstances are different from the above. You may be in-between the ages listed and if partnered, your partner may not be the same age as you. Neither of you might be earning the current average wage, or plan to retire at 67. One or both of you may be contributing above and beyond your employer’s SG contributions. Your super fund may generate a return different from the one assumed or have a different fee structure. Or your wages might grow at a different rate to the one assumed (see the list of ‘Assumptions’ below).
Be that as it may, our reckoner provides a quick way of determining if your current super balance is broadly on track to deliver a ‘comfortable’ retirement as designated by the ASFA Retirement Standard.
Next steps
By now you likely have a better idea about whether your current super balance is in the right ballpark. It’s a good idea to tailor the numbers more precisely to your situation using a retirement calculator. Your super fund may provide one, or you can use the ASIC MoneySmart Retirement Planner.
If your current balance is lagging where it needs to be for the retirement you want, all is not lost. You can boost your super by:
- Making additional contributions
- Switching investment options if appropriate. Options with a higher allocation to growth assets generate a higher long-term return, but you must also accept more fluctuations along the way.
Even small differences in the amount you contribute and your investment return can have a significant impact on your final balance.
Assumptions
- You own your own home at the point of retirement and have personal assets of $25,000 or less. These calculations do not take account of any investment assets outside super. (Note that the amount of investment assets you have can greatly affect the amount of Age Pension you are eligible for).
- You do not withdraw any super to pay off any outstanding mortgage on your home before retiring.
- You retire after you reach Age Pension age and convert all your accumulated super into a super pension (account-based pension).
- You are eligible for the Age Pension (or become eligible as your super balance reduces over time).
- Calculations for couples assume both are the same age and that their super balances are split evenly.
- All returns are net of fees. The assumed fees are 0.85% per year in investment fees, $74 per year in admin fees and $214 per year in insurance premiums (with no premiums payable on retirement income products).
- The assumed returns are 7.5% per year in the accumulation phase (pre-retirement) and 6.5% per year in the retirement phase.
- Results are in today’s dollars. Inflation costs are a 2.5% rise per year in the cost of living, plus a 1.5% additional rise per year in living standards.
- The above assumptions are considered to be reasonable for the purposes of ASIC RG 267 (Superannuation forecasts: calculators and retirement estimates) as they align with the default assumptions contained in ASIC Corporations (Superannuation Calculators and Retirement Estimates) Instrument 2022/603.
- We also recommend you review in full the assumptions that MoneySmart lists below their calculator.
- Calculations were made in January 2023.
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