Superannuation, when the topic comes up most people tune out. Some stress over their super balance. Others haven’t a clue how much is in there to begin with. Young people often don’t think much about it and the oldies wish they thought about it sooner. Many are completely unaware how the whole system works.
So how much should you have put away for retirement? That answer depends on a few things. It’s recommended that by retirement (roughly sixty five) you should have a balance of at least five hundred and fifty thousand dollars in Australia. The experts recommend a minimum balance of three hundred and sixty thousand dollars at age fifty five and just short of two hundred thousand dollars by age forty.
If you are only getting started with your career, at twenty five they recommend having at least eighteen thousand dollars in your super account. Although by thirty you should have almost sixty thousand dollars according to the so-called experts.
That was a lot of numbers so bare with me. It is all good and well to tell people what they should have in their account. The reality is different to the textbooks. Sixty five year old men on average have four hundred and thirty six thousand dollars. It’s even worse for women of that same age. Average Australians retire with over $100,000 less than recommended.
Is it that bad for everyone younger than them? Mostly. The average forty year old male is one hundred and seven thousand dollars behind the recommended balance. The average thirty year old is about forty two thousand dollars behind. The average twenty year old male has less than 50% of the recommended balance. The stats are all slightly worse for the average Australian female as well, trailing slightly behind men in all age demographics.
Let’s be honest though, how much we need for retirement is deeply personal. Although averages are great for statistics, they kind of suck at telling the whole picture. Ironically most Australians don’t sit on the average. Some people earn more and some people earn less. This will affect their super balance. Some spend more and some spend less. This will affect how much money they really need to retire comfortably.
That’s the key to the whole thing. You want to be able to retire comfortably. You don’t want your quality of life to dip too much. No one wants to retire just to count their pennies. Too many retirees have to worry about whether they can afford their groceries each week. You don’t want to be in that position at seventy five.
It can be hard to know just how much you will need to live comfortably. If you are used to an eighty thousand dollar income, and you are planning to work up until your seventy, then you will likely last longer than someone that is used to spending one hundred thousand dollars a year working the same time.
Let me break it down further. If you have the recommended five hundred and fifty thousand dollars in your super, and you spend fifty thousand dollars a year then your money will last roughly eleven years. That is your total balance, divided by your spend. Someone spending eighty thousand dollars on the same super balance would only last six and a half years. That is 550/80 = 6.8 years. Total Balance divided by yearly spend.
Of course it is worth noting that presuming you have paid off your mortgage it is likely you will have less expenses than the average worker. Kids have usually long moved out which also reduces expenses. Most retirees aren’t spending eighty thousand dollars each year. However many Australians have dreams of traveling using the money in their superannuation. So you would need to deduct any major purchases like travel or new cars from the total balance to get a more accurate idea of just how long your retirement could last.
With this knowledge, most Aussies quickly figure out they are desperately short on where they should be for the retirement lifestyle they want. So what’s the best way to grow your superannuation? Of course the best advice for yourself will come from a professional who knows the ins and outs of your finances. I highly encourage people to consider tailored advice.
As a general rule, there is a risk line. As you move from younger to older in your working career, you can afford to take less risks. This makes a lot of sense. Someone retiring next year probably can’t risk their money being lost as they will need it in the near future. That being said, a twenty year old has a long time to invest their money, they won’t be retiring any time soon. It only takes a moment to realize that a normal twenty something year old can take a few more risks than a sixty five year old. They won’t need the money as quickly, they have time to make it back up and recoup losses. They can also afford to invest on a longer time horizon. A sixty five year old now will likely have passed away before the twenty year old has even finished their working career.
Picking the right allocation is the best thing you can do. Aussies closer to retirement shouldn’t be risking as much as the Aussies who are much younger. You can picture your work life in a straight line. At one end, young ones take higher risks and at the other end, those close to retirement protect what they have. As we move through our work life, we move away from high risk towards the conservative approach the closer we get to retiring. Thirty five year olds can risk more than fifty year olds and so on.
For those who are young, the best way to get ahead is to pay attention to your superannuation whilst you are young. Investments need time to grow. The longer someone waits to start planning for retirement the harder it will be for them to hit their target balance. Just as an example, two hundred and fifty dollars a month will turn into over eight hundred thousand dollars if you start at age twenty five, however if you start by age thirty five, it will only grow to around three hundred and seventy five thousand dollars. Even worse, if you wait until forty five, it will only grow to one hundred and forty eighty thousand dollars. Of course this all on the averages, presuming a rate of return of eight per cent annually. Most superannuation funds will be able to hit an eight per cent rate of return consistently. If you are lucky enough to still be young, pay attention to that superannuation account early!
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*Data for this article was provided by QSuper.
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