Will your super keep you above the poverty line?

May 26, 2016

If you’re planning to retire in the next 10 years, you should look closely at your superannuation fund’s strategic target at retirement to ensure that you are not left living your retirement years below the poverty line.

With essential living costs increasing at a faster rate than the official CPI rate, and with doubts about the long term sustainability of the age pension, many Australians retiring in the next 10 years will be forced to live below the Poverty Line unless they can accumulate more than $1m in superannuation and other investible assets by retirement.

According to the University of Melbourne, the Australian Poverty Line for a couple with no dependents is $698.57 per week or $36,325 per annum. Indexed for CPI, of say 2.5%, we would expect the poverty line to be $45,400 in 10 years time when the retirement of the baby boomers is at its peak.

Today, most retirees require at least $72,000 to live a reasonable lifestyle, which is roughly double the Poverty Line. Indexed for inflation of just 2.5%, in 10 years a retiree will require at least $90,000 per annum to maintain a reasonable lifestyle. This means retirees will need a superannuation balance of more than $1.5m at retirement.

So the question remains: will you have sufficient superannuation (more than $1.5m) that provides you with an income of $90,000 per annum in 10 years time, so you can live a comfortable lifestyle in retirement?

The theory in practice

Take for instance Andy and Sue; both aged 50. They want to retire in 10 years at age 60. They feel financially secure, with a home worth $1.5m, no mortgage and have $300,000 in superannuation between them. They expect their three children to be financially independent by the time they retire. Andy earns $105,000 and Sue $45,000, while their superannuation balances are $205,000 and $95,000 respectively. Their employers make the basic 9.5% superannuation contribution each year and their super fund projections show that they will have a combined balance of more than $750,000 by retirement. Their current funds are diversified into shares, property, fixed interest and cash and their super funds have returned an average of 8% per annum over the last decade. Assuming their wages are indexed by an inflation rate of 2.5%, at an 8% earnings rate their estimated superannuation balances in 10 years should be a combined $762,000 ($592,000 in today’s dollars), which seems a reasonable amount.

Lanham Financial Advisory - May Blog Current Projection

From the balance at retirement of $762,000, Andy and Sue would expect a regular income stream of approximately $3,812.50 per month ($45,750 per annum), indexed by CPI, at retirement.

However, this income will only allow Andy and Sue to live on the Poverty Line in retirement and is well short of the $90,000 per annum required to live a reasonable lifestyle.

Lanham Financial Advisory - May Blog Income In Retirement

So while Andy and Sue are comfortable with their balance of $300,000 growing towards a balance of $760,000 at retirement, they are actually alarmingly short of what they will need to live a reasonable lifestyle throughout retirement.

I’ll provide some basic solutions in my next blog.

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Disclaimer: The advice provided on this website is general advice only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this advice you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs.