The biggest super question of all

SUMMARY: How much super should I have now for someone my age? Here’s a starting point – by 50, you should have 3.5 times your current salary.

“I’m X years old. I’ve got $Y in super. Am I on track for a comfortable retirement?”

There is an overabundance of statistics in superannuation. Government instrumentalities and fund managers fall over themselves to produce unfathomable reams of information.

Much of that information is useful in an overall, if not personal, sense. We know how much super is in the system. It is clear how much worse off women are when it comes to their super balances (largely because of taking time off to raise a family).

We know average balances by age and gender and that for every working Australian there is approximately three super accounts. We know how many SMSFs there are.

Here’s how much you income you need from your super and non-super investments at the close of play for a “basic” or “comfortable” retirement.  And, with the lift in the superannuation guarantee from 9% to 12%, here’s how much extra super the average Australian will get.

But there is one question I get asked regularly for which there is no good statistic, or calculator, that I have ever seen.

“I’m X years old. I’ve got $Y in super. Am I on track for a comfortable retirement?”

Sometimes, it’s easy to answer that question with a yes or a no. When I see a 40-year-old on $100,000 a year, with a super balance of $250,000, I can say, comfortably, “you’re on track”.

But what about the 35-year-old earning $60,000 with $40,000 in super? Or the 45yo, earning $80,000 with $180,000 in super? Or the 50yo earning $90,000 with $100,000?

It would be great to be able to ask two things about a person – their age and their current super balance – and be able to have a quick-fire answer as to whether they’re on track or not for what’s considered to be a “comfortable” retirement. But I’ve never seen any such rule of thumb.

So today, I’m going to try to put some numbers around that.

Table 1: Average super balances by age

I’m running Table 1 to show you how useless the current information is. These are the “average” super balances for people at ages of five-year intervals. You could look at that and think “I’m doing quite well, because I’m higher than that figure”.

But these are averages in a superannuation system that is far from mature, which it won’t be for several more decades.

And we’re told that the average Australian is going to be woefully underfunded via superannuation for retirement. So, if you’re a little above average, based on that as a comparison, you’re still a long way from having sufficient super for the retirement you hope to have.

To illustrate that point best, a 55-year-old with $128,371 in super is not going to be able to survive too many years spending $41,000 a year, which is considered to be a comfortable retirement.

Unfortunately, there are too many variables to build a perfect calculator. The biggest of which is: “What sort of lifestyle do you want in retirement?”

So, I’m stuck working with averages. Let’s start with what we need in retirement. The benchmark in this area is the ASFA Retirement Standard, which says for a “comfortable” retirement (I’ll assume all Eureka Report readers are aiming for at least that), you need $41,169 for a single and $56,317 for a couple.

I’ll also another broad assumption that I picked up from a reputable website (ipac) that if you are planning to work through until age 65, you would need 13 times that income figure to last you through a reasonable retirement. (If you want to retire earlier, you would need higher multiples.)

So, if you’re going to work through until 65, you’d need a super pot of approximately $535,197 for a single and $732,121 for a couple. We’ll work solely on the single person today.

(What retirement income you will demand in retirement is very difficult for a 30-, 40- or even a 50-year-old to answer. Retirement is still too far away and there is too much life to be lived, and paid for, in the several decades until retirement.)

The closer you get to retirement and being able to access your super – that is, somewhere between 55 and 65 – the easier it gets to answer that question. You can then make a decision as to whether you need to carry on in the workforce a little longer or not, or make larger concessional or non-concessional contributions.

But, for example, if you’re 35, how much should you have in super? If you’re 45 and you have $150,000, are you looking okay? Is a 50-year-old with $200,000 in super on track for a “comfortable” retirement, or are they on track for a diet of instant noodles?

Here’s where the “average” super statistics are particularly useless.

The Superannuation Guarantee started in 1992, with a legislated minimum of 3%. It rose from there to 9% and we’re now on our way to 12%. That means the superannuation system won’t be fully mature until those entering the workforce (assume at age 21) when it hits 12% in 2021, turn 65 in 2065.

So, at what age should someone have their current annual salary in super? At what point, roughly, should I have double my current salary in super? Three times, four times, etc.

In order to do that, I’ve had to make some assumptions. I’ve assumed an average salary of $70,000, after-tax super returns of 6.3% (roughly a balanced fund), prices inflation of 2.5% and wage inflation of 3.5%.

For now, I’ve used SG contributions of 9.5%. They aren’t at that point yet. But many people reading this will have had large portions of their life receiving less than that percentage of their income paid into super, while many more will have higher amounts for a larger portion of their working life. And most readers of this column will be in that boat.

I have also assumed that they are aiming for that “comfortable” retirement, as outlined by ASFA.

Now, if you want to retire at 65, here is roughly how old you should be by each multiple of your salary.

Your first marker is that you will need to have approximately your average salary in super in your mid 30s – approximately 36 with my calculations. That is, it will have taken you about 15 years of working (and starting with a $0 balance) to have in super about one year’s salary.

From there, compounding makes things a bit easier.

Roughly, the average wage earner would need about double their $70,000 salary in super in their early 40s (about 43) and by the time they’re 50, you need about 3.5 times their salary.

From there, compounding really kicks in and your super should be adding another year’s salary every few years (largely through earnings on the bigger balance and less so from SG contributions).

These figures assume that super is your only income post retirement and that you don’t also have shares and property or other income-earning assets sitting outside of super. Given of what we know about the average SMSF owner, this would be a fairly low post-retirement income stream.

But even if you want a far more impressive lifestyle in retirement, these rules of thumb would probably be reasonably accurate. (I’ll aim to test them further in the coming weeks.)

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.

Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au