Are your clients happy with their superannuation?

Claudine Siou investigates some superannuation benchmarks that will help ensure clients enjoy a comfortable retirement.

To most people a comfortable lifestyle in retirement means being able to afford gifts for the grandchildren, dine out occasionally, renovate a bathroom or kitchen or maybe buy a new car.

A couple will need about $54,562 and a single person, $31,263 annually to retire comfortably today. This assumes they own their home outright and are relatively healthy. The Association of Superannuation Funds of Australia (ASFA) retirement standard on which these estimates are based is a useful benchmark for retirees and pre-retirees.

It’s an indicator of the amount of income that a couple or single person would need to support either a modest or comfortable lifestyle in retirement. But what does it mean for younger generations, who naturally are less engaged with their superannuation?

According to the final report on the Super System Review, “Members are often not engaged with their superannuation until closer to retirement… Since the introduction of the ‘Choice of Super’ legislation, switching rates between funds have actually declined from around 5 per cent in 2005 to 2 per cent by the end of 2009” shows clear evidence that members generally are disengaged with their superannuation.

Of the 80 per cent of members who have invested in the default investment option in the employer’s default fund, “approximately 60 per cent of members do not make active (investment) choices.” The MySuper product which was recommended by the Super System Review is designed to cater for this vast majority of unengaged members.

Not all members are disengaged with their superannuation. Engagement may depend on factors such as the member’s age, account balance, education, and financial circumstances. Take, for instance, the members of self-managed superannuation funds (SMSFs).

“Compared to members of other types of superannuation funds, SMSF members are on average older, earn a higher income and have larger superannuation balances.”¹

With average assets per member of $439,037 (2008/09)², its easy to see why SMSF members have such a strong interest in their superannuation. The rapid and continued growth in the number of SMSFs is evidence of more members seeking a closer level of engagement with superannuation.

The Australian Taxation Office (ATO) statistics show the total number of SMSFs have grown from 273,049 in 2004 to 424,059 in 20102. They also account for more than 30 per cent of all superannuation assets.¹

We can expect all members to have greater involvement with superannuation as account balances grow to historically record levels. Treasury predicts that the average superannuation account balance for all fund members will grow from $70,000 in 2009 to $180,000 in 2035³ (in today’s dollars).

This can be compared to the average super balance of $165,000 for pre-retirees aged 55-64 in 2009⁴. By 2035 pre-retirees are likely to have significantly more than $180,000 in superannuation.

For younger generations, the ASFA retirement standard might not mean a lot as retirement seems so far away for them. The retirement standard calculates the income needed today to fund retirement today.

Compare this to a 40-year-old who may want to know what they need to do today to retire comfortably in 30 years time. What may mean something to younger generations is the size of the lump sum required to fund a comfortable retirement. Also, they are interested in how the lump sum can be accumulated over a person’s working life.

Based on the ASFA research, a couple needs a superannuation balance of over $500,000 combined with a part age pension to support a comfortable lifestyle in retirement. An individual earning $100,000 per year (plus average wage increases) for 30 years may achieve the required balance if they contribute 12 per cent of their salary each year.

The same would apply to a couple, where both members earn $50,000 for 30 years and contribute 12 per cent of their salary each year.

Using this benchmark, a working individual can quickly ascertain whether they are on their way to achieving a comfortable retirement based on how much they contribute, how much they earn and how many years they are expecting to work over their lifetime. 

Of these three factors, we can most easily change how much we contribute to superannuation. Most people acknowledge that contributing the current compulsory 9 per cent of earnings to super will fall short of meeting retirement objectives.

The government recognises this and intends to progressively raise the rate to 12 per cent by 1 July, 2019. The low level of engagement with superannuation may be the reason that:

• We are unwilling to increase our superannuation contributions;
• We find it difficult to quantify exactly how much we need to contribute each year; or 
• We are unwilling to sacrifice current spending for future income. 

Whatever the reason, alarm bells should ring for most people if you consider an individual earning $100,000 for 30 years and contributing 9 per cent to superannuation will not be able to provide for a comfortable retirement. One solution could be to increase salary sacrifice superannuation contributions.

It can be harder to control how much we earn, but thankfully for those who don’t expect to earn $100,000 (or a couple, $50,000 each) there are strategies available to assist in closing the gap. Low and middle-income earners can boost their superannuation balance by taking advantage of the co-contribution and spouse contributions.

By comparing their situation to the ASFA benchmark, individuals can see the importance of utilising incentives if they are to retire comfortably. The proposed ‘low income earners government contribution’ also helps boost superannuation balances of low income earners.

Effectively it refunds the tax paid on contributions for individuals with adjusted taxable income below $37,000 and is expected to take effect from 1 July, 2012.

These days an average person is likely to work for longer than 30 years, when we consider the overall trend to continue working later in life and the increase in age pension age to 67 by 1 July, 2023.

Obviously this won’t necessarily be true for parents who take time out of the workforce for family reasons. Working for longer is another way we can edge closer to providing ourselves a comfortable retirement.

It’s important for working individuals to understand how increasing their salary sacrifice contributions, making use of the co-contribution (where available) and staying in the workforce longer can significantly impact a person’s ability to live comfortably in retirement.

Benchmarking current situations with the level of salary, contribution rate and number of working years required to produce a lump sum sufficient for a comfortable lifestyle in retirement can be very useful. It may also help individuals to become more engaged and take control of their retirement lifestyle.

Claudine Siou is OnePath’s technical services specialist.

1. Super System Review – Final Report – Part Two: Chapter 8

2. ATO Self-Managed Super Fund statistical report

3. Super System Review – Final Report – Part One: Overview and Recommendations

4. ABS Trends in superannuation coverage 25/3/2009.