How much should you have in super? What the retirement calculators won’t tell you

Widely varying calculations on how much you should have in super do little but confuse most investors – you need to do something different.

Get your assumptions correct in super when calculating your target for a comfortable retirement.

How much should you have in super? It’s the biggest investment question facing most Australians. Unfortunately, in seeking to provide an answer, the financial services industry has completely con­fused investors.

Retirement calculators that ­litter the investment landscape are designed for the median retiree with the median amount of money. Yet even with those common denominators, the answers vary so widely they are often unhelpful.

At its worst, an earnest investor could go to Super Consumers Australia and be told that a single person needs lifetime savings of $876,000. But if the same person went instead to the Optimum Pensions group they would find they only need $480,000.

Both answers can be justified, but in reality the discrepancy demonstrates their limited use to the everyday investor.

Melanie Dunn, an actuary and principal at Accurium, is an expert in the area and decided to perform a simple experiment. She looked at what investors would be told they needed to have from a spectrum of key operators in the super sector.

 Dunn discovered a remarkable range of answers. Even a major fund such as ART would say $490,000, and then ASIC’s well regarded Moneysmart site would imply a figure that was $100,000 higher at $590,000.

“The reason values published from various sources are so different is due to differences in underlying assumptions and metho­dology used to create the estimate,” she says.

Dunn says some key assumptions that can affect the result include the target level of spending in retirement, retirement age, the age the individual will live to, the type of investment returns they achieve, inflation and whether the investor owns a home.

How do you stand?

 The problem with assumptions is that they are only a snapshot at a point in time. Assumptions about longevity or inflation are different today than they were 30 years ago. Flip that over, and it’s easy to see that assumptions by the time you have spent 20 years in retirement will be very different again.

Dunn points out that a couple could go very wrong if they used an off-the-shelf assumption about how much they needed to retire. What if their own life was to deviate significantly from the models made by the calculator? You might have a couple who have come to the conclusion based on average life expectancy and average financial outcomes. But what if there is a market crash just after they retire and their core savings shrink? By the time it recovers, they are 10 years older.

Dunn offers a case study where a couple could reasonably expect a certain scenario but then a change to their initial assumptions means what they can afford to spend each year shrinks dramatically: “Let’s take a case study of a couple with $1.4m, showing how adjusting some key modelling assumptions to allow for sequencing risk and longevity risk changes what is estimated as the answer to ‘what can we afford to spend in retirement’.

“Using average life expectancy and average fixed assumptions results in an affordable lifestyle of $86,500 a year. This may sound good, but to provide high confidence the strategy will protect against the downside risk of living longer or poor sequences of future returns, a lifestyle of $71,000 p.a. is estimated as affordable based on the household’s scenario.”

Dunn says it’s no surprise people feel worried about getting calculations wrong. She also points out research that has found investors who seek financial advice have greater confidence and are less worried about retirement.

So what’s the answer?

The short answer to how much you need in super is “as much as you possibly can” – assuming you are an ambitious investor who wants to be independent.

An alternative answer is – “you don’t need anything”. Older people are entitled to the age pension, which is a minimum of $29,754 a year. It is also indexed twice a year – a generous arrangement when inflation is alive and kicking.

Certainly, many investors cannot afford to ignore the interplay between the age pension and super – more than 60 per cent of all Australians over the pension age receive some form of government pension. Roughly half of them get full pensions and the other half get limited access.

The Association of Super Funds of Australia says the median retirement balance is about $211,000 for males and $158,000 for females. This means for a huge amount of people, retirement income is a blend of what they built up in super and what they are entitled to get from the government.

Ashley Owen of Owen Analytics says the role of the pension is much larger than most people realise: “Remember you can still earn around $63,000 a year and get a pension, and a couple can earn $106,000,” he says.

Also, a crucial point here is that between the lower layer where investors retire on the government pension and the upper layer where investors live comfortably off their super savings tax-free up to $1.9m, there is a “black spot”. This is the zone where a case can be mounted that you might be better off with less in savings because you would be entitled to a bigger government pension.

The short answer to how much you need in super for your retirement is ‘as much as you possibly can’.

It’s difficult to be precise here but advisers generally suggest that between $450,000 and $750,000 is a the weakest position – you don’t get full pension access and you don’t have quite enough to optimise the benefits of the super system.

Either way, if you are in the group that wants to maximise their super, that doesn’t want to tap social welfare, you must make your own calculations – and nine times out of 10 you will need financial advice to test your assumptions.

Keep in mind that these retirement calculators assume not just that you have investments but that you run down your money over your lifetime and ultimately go on the pension.

As Owen points out, the retirement calculators always assume you live to a certain age, that you have a target date on your back, but that might not be accurate in your case.

Where investors typically challenge the calculators, they often assume they will live to 100, live off their own investments and then make calculations on that basis.

How does that work out?

As Owen put it on a recent Money Puzzle podcast: “Life is too variable to actually calculate the length of the runway, especially if you might live for another 40 years.”

He says the answer is to assume you need ongoing income: “If I’m running a portfolio for a 40-year time horizon to amortise it over 40 years, financially, mathematically, that’s as good as running a perpetual portfolio.

“You’re going to live to 100. You’re going to rely on your capital. You’re going to make sure that capital keeps growing for inflation and the withdrawals off it keep growing for inflation, which means you’re running a perpetual fund.

“So bank on living to 100. If you don’t, that’s good: If you live longer, that’s even better.”

James Kirby hosts the twice-weekly Money Puzzle podcast

Originally published as How much should you have in super? What the retirement calculators won’t tell you