Stashing away enough

IT can be confusing working out how much you need to put away for a comfortable retirement.

Stashing away enough

THERE's  plenty of arithmetic to be calculated when working out just how much money you might need in retirement, and it can be confusing.

When people talk about today's dollars, what does this really mean?

And could you come unstuck trying to calculate based on today's dollars?

The latest Westpac/Association of Superannuation Funds of Australia (ASFA) retirement index showed that for a couple to live a comfortable lifestyle in retirement they need to have an annual income of $48,374 -- that's $3641 more than the amount needed when the survey was launched back in June 2004.

But if you are currently on a salary of $150,000 a year, just how realistic is that $48,374 figure?

The old maxim used to be that you need to have about two-thirds of your final gross salary on which to retire.

So if your current income is $150,000, then you would be looking to an annual income of $100,000 a year in retirement in today's dollars.

For a 47-year-old male planning to retire at 65 in 2025, that $100,000 would translate to an actual annual income of $156,000 by then, assuming inflation increases at 2.5 per cent a year.

But of course that is all based on assumptions and a different inflation rate could mean that it is equal to $180,000 or just as easily $120,000.

Clearly you need to allow for some flexibility, as well as factoring in the Reserve Bank's target range for inflation of between 2 and 3 per cent each year.

According to Deborah Wixted, senior technical services manager at Colonial First State, to achieve an income of $156,000 a year in 2025 dollars, on a life expectancy of 20 years, you would need a lump sum of $1.15 million in today's dollars.

Again different assumptions would mean a different result -- for example, for a 15-year retirement the lump sum drops to $980,000 while for a 25-year retirement, it increases to $1.275 million.

Say you were in the position of having saved nothing in super to date -- a situation sometimes experienced by the self-employed who are too busy building up their business to worry about super. You would need to start salary-sacrificing $2912 a month (or almost $35,000 a year) for the next 18 years to achieve your goal.

The situation might be a little less severe if you already have super accumulated through the 3 per cent since 1986 when award super started and then through the superannuation guarantee after it was introduced in 1992 (initially at 3 per cent and rising to the current 9 per cent).

But you would still need to make additional contributions to achieve your goal of $1.15 million, which in 2025 dollars would be almost $1.8 million.

Wixted estimates that you would need to contribute a further $1270 a month ($15,240 a year) from now until retirement in 2025.

And if you fail to make these additional contributions, you would end up with a retirement income of closer to $69,000 a year.

That's still above the $48,374 required according to the ASFA-Westpac indeed, but it could curtail your lifestyle.

The Westpac-ASFA comfortable lifestyle restricts a couple to $201.21 a week for leisure and $43.47 for gifts and/or alcohol.

The report's definition of a comfortable lifestyle allows for older healthy retirees to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment and domestic and occasionally international holiday travel.

If, however, you have been making additional salary-sacrificed contributions all along, then the outlook is much rosier.

What if you had taken heed of the cries (that interestingly appear much quieter these days) that the superannuation guarantee should be 15 per cent, and have always contributed an extra 6 per cent?

Depending on what year you started, you could find that you have already achieved your goal.

If you have been making the additional 6 per cent since 1992 when superannuation guarantee started, when say your salary was $60,000 a year, then you could actually start taking your foot off the pedal and reduce your salary-sacrifice to just $110 a month ($1320 a year) to meet your retirement goal.

And if you had been diligently putting an extra 6 per cent away since award super came in back in 1986 when your salary may have been $42,000 a year, then you can stop salary-sacrificing altogether as the amount you have accumulated so far will more than cover your expected retirement income.

Indeed, it would deliver $110,000 a year.

All these calculations assume an 8 per cent annual return after fees and taxes.

Of course, the tax-free nature of money in super once you turn 60 makes for a powerful argument to continue building your super balance regardless of whether or not you have achieved your desired income level.