Everyone understands the importance of superannuation, but few actually take the time to check in on their balances. While making contributions, voluntary or compulsory, is essential, it’s also vital that goals are being met on the way to the ultimate target – a comfortable retirement.
Where your balance should be at each stage of life is different for everyone, but the end goal is fairly similar across the board.
Ultimately, you want to have around 16 times your annual expenditure in super by the age of 60. This will allow you to fund most of your cost of living from income and by the time the capital runs out, you’re 100 years of age.
Because different people lead different financial lives, it makes more sense to use a multiple of expenditure rather than a set number. Of course, other assets and whether or not a mortgage has been paid off are also factors in the final amount.
Some people have expensive lives, some people less so, sometimes it’s by choice – for example if you like to travel a lot – sometimes it’s not (you’ve got medical bills, for example). Either way, there is no set amount that is ideal for everyone.
Of course, inflation must be taken into account as well, which will raise that final number by quite a bit.
Say you want to have the equivalent of $1.5m in super at 60, but you’re only 30 – if we assume inflation at 2%, you’ll actually need $2,700,000 instead once you factor the increases in.
To break it down, the average Australian household has a total income of $107,000 per year, which is usually a full-time and a part-time income. Assuming the pair have paid off their home by retirement age, they’ll likely be saving 25-30% of their combined salary and spending the rest on living and lifestyle.
With a combined gross household income of $107k, the annual after-tax combined household income will be $86,316.
Assuming they spend 75% of their income and can save the rest for retirement, then they will be spending circa $64,737 per year. Assuming we would ideally like to have 16 times this in assets and super is our only asset, they will want to have $1,032,792 in superannuation between the two of them in future amounts.
In the one part-time and one full-time salary scenario, it’s assumed that the former will have 33% of the super assets, while the other has 67%. The larger will want to have $691,000 in today’s value, and the other will want $340,000. If they have a house paid off and we assume yearly inflation of 2% over 10 years, you’ve got a balance that you’re aiming for of $1,252,378.
When it comes to saving for super, there are two ways to go about it: do more now, or more later. The figures below are a ballpark for where your super should be and assumes you make some voluntary contributions along the way.
- At age 30, you should have $88,000 in super
- At age 40, you should have $262,000 in super
- At age 50, you should have $604,000 in super
- At age 60, you should have $1,252,000 in super
These numbers are based on Australian average salaries and making additional contributions of 3.4% per year. Assumed an average long term performance, net of fees and taxes of 6%.
The big jump from 50-60 is because of two key factors – you’re likely earning more at 50 than you were at 20 which means you’re percentage contribution to superannuation is higher. Further, you have the benefit of earning income and capital growth on a larger sum of money, supercharging your progress.
Of course, the more voluntary contributions you can make earlier, the better off you’ll be in the long run. If you wait until later to add to your fund, you’ll need to be putting in around 20% of your income in your later working years to achieve the same end goal.
The biggest question one can ask themselves when considering superannuation is how they want to live when they retire. Getting there will take some extra work, but it’s all worth it at the end of the day.