Three reasons why your super isn't going to cut it when you retire!
In Australia, superannuation is a regular topic of discussion in the media, in advertising, in politics and even sometimes around the dinner table. While it is broadly considered a great mechanism for supporting retiring Aussies, there are many factors that impact what can happen to your super and how well it can support you when you’re no longer earning an income.
In recent times, the federal government - as part of their ongoing legislated Super Guarantee - has implemented a series of compulsory increases to the percentage of superannuation that employers must pay employees. From 1st July 2023, the new minimum will be 11%, increasing a further 0.5% each year until it hits 12% in 2025.
Generally these increases have been welcomed by employees; who are acutely aware of needing to contribute to this ‘nest egg’ as they move closer to finalising their time in the workforce. This is an especially important time for those who are already in the last decade of their working career as the reality of no longer earning a wage starts to sink in. Regardless of how far away retirement is - many Aussies are not confident in projecting whether their ‘lump sum’ of money (which is finite once we’re no longer working) is really going to see them through.
How should you calculate how much money you’ll need in retirement?
There are a tonne of different calculators, models, articles, guides and commentators out there when it comes to how much money a person should ideally have in their super account once they retire. It’s also important to note that there is often a tiered approach to assessing the amounts and how far they’ll stretch. They tend to go from a standard of living defined as basic to comfortable to luxury; and also usually consider whether the money is supporting a single person or partnered household.
As with any forecast certain assumptions underpin the calculation and with superannuation this is no different. However, to get a true sense of your likely situation it's critically important to understand and assess the impact any assumption may have on your available cash. One of the biggest assumptions in projecting how much cash you’ll have week to week or month to month relies very heavily on you owning your home outright by the time you retire. A big monthly cost like paying rent or monthly mortgage payment are usually not factored into the calculation. Most calculations will reference council rates, some money for maintenance and repairs, water bills etc. but they assume you have paid off your primary residence before you retire. If you are in a situation of needing to fund either rent or ongoing mortgage repayments be sure to factor this in.
Recent statistics from ASFA’s consumer website reports the average amount of super for men and women in Australia, by the time they reach 60 years of age to be $359,000 and $289,000 respectively. However, if you are to look at the median super (the number not skewed by some very large outliers) the numbers are much lower at $178,000 for men and $137,000 for women.
And so if you’ve diligently contributed to your super over many years of working, have an excellent handle on how much you’ll need and how much you’ll have in retirement - why is it likely that you’ll be one of the 90% of everyday Aussies that will not be able to afford their lifestyle later in life.
Reason one - the cost of living is not going to be the same as it is now, as when you retire.
It’s estimated that the cost of living doubles every 14 to 15 years. While in most cases more time will give you the opportunity to grow your wealth and capitalise on compound interest - this is one situation where time is your enemy.
So how does this happen? Usually it's a combination of consumer price index (CPI) increases and inflation. CPI is a measure of the average change in prices over time in a fixed market basket of goods and services. While inflation is a rise in prices, which can be translated as the decline of purchasing power over time. The rise in prices, which is often expressed as a percentage, means that a unit of currency effectively buys less (or much less) than it did in prior periods.
In simple terms this will mean that the value of your money will be less, and effectively your money will not go as far. So, for example - if you’re currently a 45 year old man, predicted to retire with the average of $359,000 in 15 years from now it's very likely you’ll only be able to afford half as much with that sum of money (compared to today).
We are at the mercy of the super funds when it comes to our superannuation
Of course you would've heard (more than once) that we should always be checking our super funds for fees; making sure we don't have super spread across more than one account to minimise those fees and generally checking for performance of our super fund. But as most people who have changed super funds in the course of their working life will know, it’s sometimes hard to not feel like they are all much of a muchness.
One of the most consistent factors across all superfunds is how they attempt to grow and manage your money. This is generally done by investing in the stock market. Of course there are different super ‘products’ that can afford you different levels of risk around speed and quantity of return; but broadly speaking the way your funds are managed is via investing in stocks and shares.
As the industry is hyper regulated you rightly have a sense of peace that nothing untoward is happening with the risks they take when investing your money. However, the volatility of the stock market is not something that anyone can control. A stock market ‘crash’ is defined as an instance where 30-50% of market value is lost in a sudden moment, or a short period of time. However of course there are many examples of where larger percentages have been wiped off the stock market. In fact the market can be so sensitive to world events that there have been examples of Donald Trump, ex-president of the US sending out a controversial tweet and in response $60 billion gets wiped off the Australian stock market overnight. This is only an example, but other world events like September 11, the Ukraine-Russia war, general political instability and even the recent Covid19 pandemic were all drivers for crashes - sometimes causing stock market values to plummet by more than 50%.
In fact, history teaches us there have been 14 major crashes in the last 70 years. This averages out to one major crash approximately every five years. The uncontrollable nature of the stock market and the intrinsic impact this has on the entire ecosystem of superannuation means that you dont ever really know how much money you’ll end up with when you're ready to draw out some of your hard earned savings.
We’re living longer and we’re living larger!
It probably doesn't come as any real surprise to most that in this day and age both men and women are living longer. Scientific advances in modern medicine, an overall better quality of life and a deeper understanding of managing our own health and wellbeing means the average lifespan of a person in a first world country is substantially higher than it used to be.
While at face value this might seem like fantastic news - it also means we need to fund a longer life. Many pensioners are finding themselves running short of money; and sadly this can correlate to a time when they need (and deserve) more than their savings can afford. Increases in medical care, upgrading their home or even paying for assisted living facilities are some of the larger expenses that crop up especially as we live longer. And these are the more fundamental needs; to say nothing of being able to spend money on things that allow us to really embrace and enjoy retirement. Activities like dining out, hobbies and sports, and of course travelling - both domestically and internationally.
The kind of lifestyle that we may be accustomed to during our working years is often not replicated in the modelling of how much you will need to live your best life during retirement. In fact some suggestions of a ‘comfortable’ existence are built off having a mere $37,000 per year available. This level of cash would allow a person to eat out regularly at a cafe, but they’d have to save for one annual domestic holiday and rely solely on the public health system and free benefits when it comes to health care needs. Being forced to suddenly ‘watch your pennies’ and cutting down on expenses is a very real outcome for those that rely solely on their superannuation.
Uh oh - feels like I'm not going to have enough super!?
One of the best ways to reframe your plan when it comes to funding your retirement is to broaden your thinking. Putting your super projections aside, simply start by asking yourself this - how much money would I like to have available for me to spend each week? A basic sum of ‘x’ amount of money per week, multiplied by the weeks in the year, multiplied by the amount of years you (and perhaps your partner) are likely to have left from the time you retire. And bingo - this is your new goal!
Accepting that there isn’t any way you can control the three reasons why your super wont cut it - it’s best to explore additional investments that can top up your retirement fund; or (even better) continue to generate income for you to subsidise the amount of money you’ll have access to each and every month. Avoid a life of two minute noodles and baked beans and truly live your version of ‘comfortable’ - spending time doing what you enjoy whether that’s socialising, travelling, or taking care of your home and your family.
Our high quality, completely ‘done for you’ investment service has been successfully building wealth for everyday Aussies for over a decade now. We’re passionate about using property to create a true financially comfortable retirement for everyday Aussie families. This is why we research, source, negotiate and secure the perfect investment property for you - at the right price, in the right place.