Don’t worry, you’ll have enough in retirement … with one big proviso

Sometimes I think I should appoint myself chief ageing reporter for this august organ. Why? Because I’m the only one left around here to know about – and care about – what’s happening to the oldies. But the truth is it’s not a lot more oldies we need to attract to secure this masthead’s future. That’s why we’re training up bright young economists such as Millie Muroi.

But, while we’re having old folks’ day, let me ask you a personal question: are you sure you’ve saved enough to ensure a comfortable retirement? Now, you probably hate being asked that question. Your conscience has long been telling you the answer’s most likely “no”. Ask someone from the superannuation industry, and they’re almost certain to leave you feeling inadequate.

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But if you think that’s what I’m on about, you’re wrong. Prompted by an eye-opening article by the Grattan Institute’s super expert Brendan Coates, on my second-favourite website, The Conversation, I’m here to tell you the opposite: the independent experts say the superannuation system will ensure most people retire with enough superannuation to live comfortably and, indeed, many will have more than they need.

It’s only natural to fear you haven’t saved enough, but the sad truth is that the financial market people who earn their living by managing all the money we save via super have gone for many years playing on our fears, giving us a quite exaggerated impression of how much we’ll need.

If you’re trusting enough to ask the Association of Superannuation Funds lobby group how much a couple would need to live at a comfortable standard, it will tell you they’ll need an income of more than $73,000 a year, which would require a super balance of $690,000.

What the lobby group doesn’t tell you is that this “comfortable” standard is higher than what 70 per cent of couples enjoy while they’re working. Nor does it tell you that the only way to have more in retirement is to have less while you’re working.

It makes sense to use super to shift some of your income from your working years to the years when you’re not working. But is it sensible to shift so much you’re denying yourself during your working life so you can have a much higher standard of living in retirement?

Whereas the lobby group represents the interests of the people running super schemes, Super Consumers Australia represents the interests of their members. It calculates that couples who want a “medium” standard of living in retirement – that is, where they’re able to spend more than the bottom half of retired couples – need a super balance of about $370,000 on retirement, which would let them spend $60,000 a year.

Only if a couple wants to be in the top 30 per cent of retirees, able to spend $80,000 a year, would they need to retire with a super balance a bit over $1,000,000.

Do these more honest estimates strike you as too low? That’s probably because people of working age tend to overestimate how much they’ll need in retirement. Coates lists the many savings you make after you retire.

For a start, you don’t have work-related expenses. And retirees have more time to do things for themselves. Don’t forget that most people retire on some combination of super and the age pension. Remember too that, rightly or wrongly (wrongly in my book), the aged pay much less tax on their income than workers do. This makes a big difference to how much you need to live on.

Pensioners get discounts on council rates, electricity, medicines and public transport, and other benefits. These can add up to thousands of dollars a year. And whatever income you need at the start of your retirement, it typically falls as you get older. Coates says retirees tend to spend 15 to 20 per cent less when they’re 90 than they did when they were 70.

I don’t know if you’ve noticed in your own parents – I certainly did in mine – that oldies reach a point where they could afford to go out and spend money (another overseas trip, for instance) but they don’t feel like it. It surprises many that it’s common for oldies to save part of their income, simply because they didn’t have a reason to spend it.

Of course, deteriorating health stops people from spending. But most health and aged care costs are picked up by the taxpayer.

All this says people don’t need to spend as much as you may think in retirement. But everything I’ve said comes with a big proviso: that retirees own their own home. It’s been true for many decades that the great majority of retirees own their homes outright. That’s still true, though less so. These days it’s more common for people to retire still owing money on their mortgage. In coming decades, however, it won’t still be true that most retirees own their homes.

Meanwhile, I’m definitely not saying that people who have to rent in retirement have it easy. Far from it. But when you’re a home owner in retirement your spending on housing is far lower than for people still servicing a mortgage or renting.

The Retirement Income Review conducted in 2020 for the Morrison government judged that anyone with retirement income equivalent to between 65 and 75 per cent of their pre-retirement income would be able to live comfortably. It also found that, by this standard, most retirees will be doing fine.

But that was when compulsory employer contributions to super stood at 9.5 per cent of your wage. By now they’re 11.5 per cent and will rise to 12 per cent in July.

That’s why I say that those retiring in coming years won’t just be comfortable, they’ll be rolling in it.

Ross Gittins is the economics editor.

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