How far will your super take you?
Case study 1 - The impact of early retirement
Background
Daniel is 35 and receives a salary of $60,000 a year. He and his wife Alison, also 35, own their own home. Alison does not receive an income. Apart from their home and $40,000 Daniel has saved in his super account they have no financial assets.
Recently, Daniel and Alison started thinking about their future. They are considering whether there is anything they should be doing now to help them maintain their current lifestyle when they retire. They are both healthy and want to ensure they have enough money to last them until they are 90. Daniel and Alison have estimated that they will need around $45,000 p.a. in retirement in order to maintain their current lifestyle. This is approximately the same amount as Daniel now receives from his income after tax has been deducted.
Daniel and Alison decide to look at the possible outcomes if they don’t make any changes, and what they should do to reach their goal.
What would happen if they didn't make any changes?
If they do nothing Daniel and Alison will be able to afford:
- their goal income of $45,000 per year until age 78, then the aged pension only, or
- an income of $36,000 per year until age 90 To reach their target of $45,000 until age 90 Daniel will need to save 11% of his salary each year in super.
To reach their target of $45,000 until age 90 Daniel will need to save 11% of his salary each year in super.
The possible outcomes of making no contributions do not appeal to Alison and Daniel. They don’t want to initially have the lifestyle they are aiming for, only to have to resort to the aged pension alone at 78 and live frugally. Neither do they want to live more modestly on $36,000 per year.
On reflection, Daniel and Alison decide they are willing to sacrifice some luxuries now for a better retirement. They agree that they will save the extra 11% p.a. of Daniel’s salary in order to meet their retirement goals.
Daniel asks his employer to make the adjustment to his pay, and is happy that he has taken steps to achieve the retirement he and Alison desire.
Important Note: the above example does not take the Government co-contribution into account. If Daniel’s total income (assessable income plus reportable fringe benefits) is less than $58,000 a year after he has made salary sacrifice contributions, and he makes additional after-tax contributions, he may be eligible for the Government co-contribution. Read our Co-contributions fact sheet for more information.
Key Assumptions:
- Only income in retirement is super and social security Age Pension
- Social security entitlements assumed to apply as per rules to be introduced from 1 July 2007
- Tax on superannuation benefits assumed to apply as per rules to be introduced from 1 July 2007
- Average rate of investment return (net of tax): 7.0% p.a.
- Average rate of salary growth: 4.0% p.a. (implies CPI inflation of 2.5% to 3%)
- All values expressed in current dollars, i.e. a real rate of investment return of 3% p.a. relative to salary growth.
- Expenses during accumulation phase: 0.6%
- Expenses during pension phase: 1.0%
Desired Lifestyle |
Approximate Income Required* |
|---|---|
Low cost - frugal |
$20,000 per couple |
Modest but adequate |
$26,000 per couple |
Comfortably affluent and sustainable |
$45,000 per couple |
* According to the Social Policy Research Centre at the University of NSW.
Your Checklist
- Set your goals
- Estimate how much you’ll need in retirement
- Consider when you want to retire
- Use the super maximiser on our Web site to estimate how much to save**
- Start saving
More Information
You may want to take a look at our 10 Financial Tips to help you get started.
** Super maximiser is only available to Russell SuperSolution members. To access this calculator, please log in to SuperSolution. Super maximiser may not be available to you if you are a defined benefit member due to the individual nature of your benefit calculation.
See what would happen if Daniel and Alison started making extra contributions early