Why saving for retirement isn't as scary as it seems

29 October 2020

Halloween is just around the corner, and not long after that, so is retirement — at least for a number of people in Australia. According to the most recent figures available from the Australian Bureau of Statistics, an estimated 500,000 people across the country are getting ready to exit the workforce for good within the next five years, becoming one of the 3.9 million Australians who have officially closed the books on their career.

However, due to the perpetual growth in the cost of living as well as insufficient savings and reports indicating Australia's pension system may be underfunded, some are wondering whether their retirement years will be more trick than treat.

When you make the right preparations and have a plan in place, there's nothing to be spooked about. But first, let's examine the source of the fright.

You're in for a sweet reward during retirement by making the right preparations

The $2 trillion gap

According to a recent study conducted by the Financial Services Council, the retirement savings gap has grown over the years. This shortfall refers to the amount of additional money needed for all eligible beneficiaries to have an ‘adequate’ retirement. That amount, according to the report, is $2 trillion, even though the government increased the mandatory superannuation contribution rate to 9.5%, up from 3% in 1992.

On a per Australian basis, the savings gap for retirement living amounts to an estimated $70,199 when including the age pension and approximately $187,200 per individual when the age pension is excluded.

There are many different reasons why people may not be contributing as much to their retirement nest eggs as they could. For some, it may be the cost of homeownership. For other people, the source of the struggle is the cost of childcare, an ongoing expense for families that never seems to go down.

Pairing these realities with the fact that 30% of women retirees have no personal income, 30% of retired men rely on superannuation as their primary source of funds and as many as 500,000 Australians intend to retire within the next five years, you can understand why some people are fearful.

They shouldn't be. And neither should you. Here's why.

Contrary to what the critics say, most Australians will be able to finance their retirement. In an analysis conducted by the Grattan Institute, most people in the country who remain in the workforce will be able to retire and pay for it. The study found that the majority of retirees can expect to be making approximately 90% of what they would normally be bringing in as a full-time worker. That's substantially more than the 70% of pay recommended by the Organisation for Economic Cooperation and Development and the Mercer Global Pension Index.

Run the numbers

There are a variety of ways you can maximise your retirement savings efforts beyond relying on the contributions that are regularly funnelled into your super. But the first course of action is to determine exactly when you plan to retire. Since people are living longer, many are opting to stay in the workforce longer, but currently, around 26% of retired men are between the ages of 60 and 64, as are 19% of retired women. Generally speaking, funds from superannuation are designed to last between 20 and 25 years. With the average life expectancy presently at 79 years, run the numbers to see if what you have saved is enough. According to the Association of Superannuation Funds of Australia, the typical single person who is 65 years old can afford a modest lifestyle on $27,900 of annual income, while a couple would need $40,380. For a comfortable lifestyle, the figures rise to $43,687 and $61,909, respectively.

Contribute more to your super than what is required

As previously noted, 9.5% of your earnings go into your super, as the law requires. That figure will rise to 12% come 2025. But you don't have to wait that long. Voluntary contributions that go over and above the percentage that's mandated can add an extra cushion to further pad how much you'll be able to draw from once you decide to retire from your current line of work. A little goes a long way - making additional contributions to super doesn’t have to mean a huge financial sacrifice. In fact, making small additional contributions over time can be more effective than stepping up your saving as you near retirement. Additionally, you're incentivised to make extra super contributions with before-tax or after-tax dollars. You can even do both if you want. Just be aware that after-tax contributions have a ceiling of $100,000 per year if you're 66 years old or younger.

Your partner can help you realise your retirement dreams.

Take advantage of spouse contributions

Did you know that your spouse can top up your retirement savings and receive a tax offset for themselves? For instance, if you receive $37,000 per year or less in assessable income, your spouse may be able to claim a tax rebate of 18% on contributions up to $3,000.

Should you be making more than this threshold, your spouse can achieve the maximum rebate of $540, assuming the same $3,000 contribution per annum figure.

Spend your age

Even if you're really good with finances and careful about sticking to a budget, you may be apprehensive about how much you're spending at any given time, fearful that you'll run out of money well before you anticipated. The Actuaries Institute came up with a rule of thumb that is meant to serve as a guideline. It's a two-part process that will help you ‘spend your age’. Here's an example of how it works:

  • Whatever the first digit of your age happens to be, draw down that number as a baseline rate (e.g. if you're 60 years old, your number would be 6%).
  • If your account balance is between $250,000 and $500,000, add 2% (e.g. 6% + 2% = 8%).

So if you're between 60 and 69 and had a superannuation balance of $350,000, your annual drawdown would be 8% of $350,000, which is $28,000. In this context, ‘drawdown’ refers to the amount of money you withdraw from your fund for use in terms of day-to-day spending.

As you approach retirement, don't be scared. Australia's world-class retirement system and your own diligence will ensure you're prepared. Get in touch with our team today and find out how LGS can help you live out your retirement dreams.

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The information on this website is of a general nature only and does not take into account your personal objectives, situation or needs. You should consider obtaining professional financial, taxation and or legal advice tailored to your personal circumstances prior to making any financial decision.