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How much is Enough?

By Ken Dance, Consulting Actuary to SuperEasy, and Colin Grenfell, Associate Director of SuperEasy

You need to ensure that the future superannuation benefit you receive, together with monies from other long-term savings, will provide for the lifestyle you want in retirement.

What are you planning to do when you retire? Perhaps travel around the world, go fishing or do nothing? Even if you have no real plans for retirement you are still going to need to live, and you are still going to need some kind of an income. Research by the Association of Superannuation Funds of Australia (ASFA) shows that you might need a retirement income of at least 60% of pre-retirement income. That would be equivalent to a lump sum on retirement equal to around 11 times your pre-retirement income or an average rate of accrual of 15% of annual salary over an average working lifetime after allowing for inflation and the time value of money.

Okay, so you know that saving for your retirement is the right thing to do, but:

How much should you contribute?
You probably already have some superannuation, so how much superannuation is enough for you?

Putting a little extra into your superannuation each year, or on a regular basis, can make a big difference to the benefit you receive at retirement. Because of the power of compound interest, the earlier you start the greater the benefit over the long term.

To fully answer these "How much is enough for you?" questions, you need to consider how taxation and social security issues impact on your situation. For example, should you or your spouse contribute, should contributions be "undeducted" or "salary-sacrificed", how close is your current superannuation to the tax sheltered Reasonable Benefit Limits (or "RBLs")? Or will additional contributions just serve to reduce your age pension entitlements and so not give full value for money?

However you can get a useful guide as to "How much is enough for you?" by carefully working through the following four steps:

STEP ONE

Calculate your current personal "benefit scale", equals

(your account balance plus monies in other long-term savings) divided by
(your current annual salary or your annual taxable income) divided by
(the number of years since you were age 20, for males, or age 15, for females).

For example, $250,000/$60,000/(55-20) = 11.9%.

In a superannuation context this result is called a "benefit scale", but if you include other long term savings it becomes your "annual savings accrual rate". In the following steps we will use the term "benefit scale" to reflect both interpretations.

STEP TWO

(a) If your benefit scale is less than 10%

Increase your current or recent contribution rate (after considering the effect of any social security issues), or

(b) If your benefit scale is 10% to 15%

Increase (or maintain) your current or recent contribution rate (after considering the effect of taxation issues), or

(c) If your benefit scale is 15% to 20%

Maintain (or maybe reduce) your current or recent contribution rate (after considering the effect of taxation issues and RBL's), or

(d) If your benefit scale is greater than 20%

Maybe reduce (or cease) your contributions (after considering the effect of RBL's).

STEP THREE

Monitor the above yearly. Has your benefit scale increased or decreased since your previous calculation?

STEP FOUR

See your Financial Adviser or visit www.superannuation.asn.au/calculator.

Note that with the ASFA "SuperSmartPlanner", unlike most other calculators, your projected "Annual Gross Retirement Income" and "Retirement Income (% of salary)" both include the social security Age Pension as well as the income generated from your superannuation.

For example, based on the ASFA research, referred to above, you might wish to set your target "Retirement Income (% of salary)" equal to 60%. To do this move the SuperSmartPlanner "Retirement Income (% of salary)" slide control to 60%. Note that the SuperSmartPlanner excludes administration charges and the costs of death and disablement cover, so these charges and costs need to be added to the "Employee Contributions" from this calculator.

SuperEasy Pty Ltd is not licensed to provide advice on investments, or legalities of the types of investments that you can have. SuperEasy® strongly recommends that you seek professional advice before making any investment choice or decision!

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