Nervous about retiring? You might be better off than you think

The above-average Australian approaching retirement is doing quite well, yet many don’t consider themselves wealthy, and they certainly don’t feel confident about how they’ll pay for their retirement.

If you’re in your midlife, heading towards retirement and feeling a bit nervous, you’re not alone. Even if you’ve done everything right – built up a solid super balance, paid off your home and kept your financial ducks in a row – it’s easy to feel uncertain about what the future holds.

Many retirees have money worries, but the reality is you’ll probably have more than you think.Credit: Simon Letch

The reality is, there’s a whole raft of pre-retirees and midlifers in Australia who are above average in the wealth stakes, yet still don’t feel as secure as they should.

Let’s take a look at some numbers to help you build your confidence. Currently, the average super balance for a 55-year-old male is $359,100, and for a 55-year-old woman, it’s $233,200. Those figures are the highest they’ve ever been for people at this age.

If you’re one of the 70 per cent of Australians who live as a couple, that gives you a combined super balance of around $592,100. Not too shabby, right? What you may not realise is that your best growth years are probably ahead of you, and if you keep working, that number can really only go up.

Retirement income is calculated as household income, so couples naturally have more to play with. Singles, on the other hand, may feel the pinch a bit more. But even then, they’re often better off than they think when they understand how money really works after retirement.

One of the biggest misconceptions about superannuation is that it stops growing once you retire.

There’s another reason you might be wealthier than you feel: nearly 80 per cent of 55-year-olds in Australia today own their own homes outright or with a minimal mortgage: usually between 0.6-0.12 of the property’s value at this age.

Considering the average Australian family home is closing in on $1 million, that’s a pretty significant asset under your belt. In addition, more than 1 million over-50s own rental properties. They’re the largest group of landlords in the country.

In my experience, there are three things most above-average but not wealthy people discount that, if they understood better, might ease their minds.

1. The power of compound interest before retirement

Compound interest is the eighth wonder of the modern world. It’s the principle behind our super system, and it’s superb. Most people don’t truly feel its power until their assets – like super and shares – become more valuable in their 50s and beyond. So, they don’t realise what a great position they’re in at 55 with a decent super balance, a nearly-paid-off family home and a good job.

If our average couple is planning to work until the national average retirement age of 65 and they each earn the national average salary of about $100,000, contributing the legislated employer contributions (11.5 per cent this year, 12 per cent after that) and getting a greater than 7 per cent investment return, their combined super balance could quite possibly exceed $1.4 million by the time they retire at 65.

That’s enough to generate an income of $70,000-80,000 for 35-40 years at a 7 per cent investment return, disregarding the pension. Alternatively, you could draw over $100,000 per year every year, well into your 90s, knowing that as your total super balance falls below the pension assets test thresholds, you’ll start to receive the pension too.

For a single person, it isn’t all doom and gloom either. That 55-year-old single man with an average balance, saving for another 10 years with a 7 per cent investment return and annual employer contributions from their $100,000 salary, could see their fund grow to a strong balance of $811,219.

And the woman, with a lower balance at 55, could reach $579,958 – very close to the amount that ASFA says creates a comfortable retirement for singles, at $595,000.

And I haven’t even mentioned the power of compounding in the family home, which is ultimately capital gains tax-free if you choose to downsize and top up your super.

2. Understanding post-retirement growth

One of the biggest misconceptions about superannuation is that it stops growing once you retire. The truth is, more than 50 per cent of the money your super fund generates can happen after you’ve finished working. This is because most Australians have their super invested in balanced or growth funds, which typically generate returns of 7-9 per cent over the long term.

More than half the money your super fund generates can happen after you’ve finished working.Credit: Jessica Hromas

Imagine you retire with that $1.4 million balance. In the retirement phase, where your super earnings are tax-free, a 7 per cent return could add $98,000 to your super annually.

That’s a significant amount, and if you don’t need to draw all of it to cover your living expenses, your balance could continue to grow rather than shrink. And even if you do draw it all out, that’s not eating into the capital that will generate the same return next year.

Grasping this post-retirement growth might allow you, with careful planning, to enjoy a steady income without depleting your super too quickly.

For example, if our average couple draws $70,000 per year to cover their living expenses, their remaining balance continues to generate returns, keeping their nest egg very healthy.

Over time, this can provide a buffer against inflation and unexpected expenses, and some occasional holidays drawn as lump sums, ensuring that their money lasts as long as they do.

Understanding the power of post-retirement growth can also help us make informed decisions about our investment strategy. Many retirees feel compelled to switch to more conservative investments once they retire, fearing that market fluctuations could erode their savings.

But, maintaining a balanced or growth-oriented portfolio can be a better strategy for many, allowing your super to keep working for you well into retirement.

3. Don’t disregard the pension

The pension often gets overlooked by those who have saved diligently for retirement, but it’s a critical safety net, or strategic tool, that shouldn’t be underestimated.

Even if you’ve got a healthy, above-average super balance, the pension can still play an important role in your retirement plan, particularly if you’re drawing down on your super to fund your lifestyle goals and ambitions in your prime years.

The pension is designed to supplement your income once your assets and/or income fall below certain thresholds. This means you can start your retirement drawing a comfortable income from your super and, as your balance reduces over time, the pension can kick in to top up your income.

The amount you’re eligible to receive will depend on your income and assets, but it can provide a reliable, inflation-protected source of income that lasts for life.

For example, if you start retirement with a $1.4 million super balance, you might draw down on that to enjoy a higher standard of living in your early retirement years. As your balance decreases and falls below the asset test thresholds, the pension can begin to supplement your income, helping you maintain your lifestyle without completely depleting your super.

It’s also worth noting that the pension isn’t just for those with minimal savings. Many retirees find themselves eligible for a part-pension as their super balance decreases, and this can make a significant difference to your financial security in later years.

Bec Wilson is the author of bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and is the host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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