Setting Benchmarks on the Road to Retirement

Earlier this month we looked at a rough budget for spending that set out the lifestyle that people who had accumulated different levels of assets could look forward to in retirement. The budget was based on the ASFA (Association of Super Funds of Australia) retirement standards, and their assumptions of retirement spending.

AFSA have set up two retirement standards, a ‘modest’ and a ‘comfortable’ retirement and, importantly, both are based on the person or couple owning their own home without a mortgage at retirement.

The first retirement standard is a ‘modest’ retirement, which currently allows for $46,000 of annual income for a couple or $32,000 of annual income for a single.

The second retirement standard is a ‘comfortable’ retirement, which currently allows for $71,000 of annual income for a couple and $50,000 of income for a single.

As part of the last story on retirement standards, we proposed a third retirement standard, that of an ‘expansive’ retirement, which allowed for $70,000 of annual income each year for a single person and $95,000 for a couple. The assets needed to produce these levels of income, in this article, are based on a 5 per cent annual withdrawal rate and assumes that no age pension will be received (unlike for the ‘comfortable’ or ‘modest’ retirement, which would include age pension as part of the income received). 

The Assets Needed at Retirement

The aim of this article is to set out some benchmarks for people of different ages, so people can assess whether they might be on track for a modest, comfortable or expansive retirement, even well before retirement.

The following table sets out the level of assets (superannuation, cash and investments) needed at age 67 (along with a house that is mortgage free) to fund each of these retirement standards:

The aim from here is to ‘backward map’ these figures and show the level of assets needed at different ages to be on track for these retirements.

We are going to focus on the ‘comfortable’ and ‘expansive’ retirements. It will take someone who is working full time less than 10 years of superannuation contributions to accumulate the $100,000 needed to fund a ‘modest’ retirement – the key financial focus for someone in this situation will be paying off the mortgage, which is less relevant to these benchmarks.

The key assumptions in the calculations behind the savings (superannuation, cash and investments) targets for people of different ages are:

• It is assumed that the main savings are people’s superannuation contributions, calculated at the current 11% contributions rate, less 15% superannuation contributions tax.
• The average full-time wage is currently $95,600 per annum (AWOTE). It is assumed that for the first 13 years of a person’s working life, they earn 80% of this wage (from age 25 to 38), then in the last 13 years of their working life they earn 120% of this wage (from age 54 to 67). In between these times they are assumed to earn the average full-time wage.
• Investment earnings are calculated at 4% per annum after inflation, as an approximation for the sort of returns that you see from a balanced super fund.
• All figures are in today’s dollars.
• The single person is assumed to work full-time, while the couple is assumed to earn 1.5 times the full-time income in total, allowing time away from work for periods of time.

It is important to note that a model like this is limited and should be adapted to people’s own circumstances. For example, many people make significant superannuation contributions close to retirement once their house is paid off and, if they have had children, they have moved toward financial independence. Individual circumstances like this are not captured in the calculations, so the figures presented should be seen as a rough guide.

On Track to a Comfortable Retirement

The following table sets out the level of assets needed to be on track toward a comfortable retirement for both a single homeowner and a home-owning couple. Over each 5-year period, the level of assets increases by the value of the compulsory superannuation contributions received, and investment earnings. 

A person, or couple, earning an average wage over a working lifetime should accumulate the level of assets required for a comfortable retirement, as set out in the table below.

Benchmarks Toward a Comfortable Retirement

It seems strange that a comfortable retirement can be reached with a $0 starting balance for someone age 32, however, it is worth remembering that prior to age 32 it is the period of time when people might be focussing on building a house deposit and paying off their mortgage. They will have some superannuation accumulating, which gives them a nice head start on their journey to a ‘comfortable’ retirement. 

The Same Calculation for an Expansive Retirement

The bottom line is that both the home-owning single and home-owning couple fall short of the assets needed for an ‘expansive’ retirement based on the current 11 per cent superannuation contributions rate, by about $400,000. 

So, an extra contribution is needed on top of the superannuation contribution to get people toward an ‘expansive’ retirement. 

This is calculated to be:

• $6075 per annum from the age of 25 for a single homeowner and,
• $4933 per annum (in total) from the age of 25 for a couple.

The following table sets out the benchmarks for the progression toward an ‘expansive’ retirement. The assumption for investment earnings remains the same, however, contributions are the superannuation contributions plus the extra annual contribution of $6075 for a single homeowner and $4933 (in total) for a home-owning couple.

Benchmarks Toward an Expansive Retirement

Conclusions – The Lessons Learned from the Calculations

The lessons from these calculations, keeping in mind the very general nature of the assumptions, include:

Both a modest and comfortable retirement are likely to be well supported by superannuation savings, assuming a person/couple work most of their life and receive superannuation contributions

In general terms, owning a house is crucial to the AFSA calculations. If you do not own your own house, you will need to adjust your calculations to accommodate living costs.

While superannuation looks to be adequate for the average home-owning household to meet a modest or comfortable retirement, people who aspire to an expansive retirement will need to save beyond employer superannuation.