How far will your super take you?
Case study 3 - 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. They want to be able to retire with an annual income of $45,000 which is roughly equivalent to Daniel’s current after-tax salary. Alison also has a desire for their income to last until they are 90, because she is aware that life expectancies are increasing.
What will happen if Daniel retires at 60?
Daniel is considering retiring at 60 instead of 65 so he can spend more time with Alison. He knows that he will need to save harder to afford an earlier retirement, but hasn’t been adding extra savings to his super until now.
To reach their goal income of $45,000 per year until they are 90 Daniel will need to save:
- 11% of his salary per year to retire at65
- 26% of his salary per year to retire 5 years earlier, at 60
Daniel would like to retire early, but had not anticipated that it would make such a difference to how much he needs to save. He and Alison can’t afford to sacrifice 26% of his income every year. Daniel feels more comfortable with saving the 11% p.a. he would need to retire at 65. He wonders what the outcome would be if he saved that amount but still considered retiring early.
If Daniel saves 11% of his salary in super every year and wants his balance to last until age 90 he and Alison could receive:
- $45,000 per year if he retires at 65
- $36,000 per year if he retires at 60
Daniel and Alison consider they would be reasonably satisfied with $36,000 per year. They know they would not be able to live in comfortable affluence, but see that they could have a lifestyle that is more than modest. Daniel sets up a regular salary deduction to save 11% of his salary in super. He is still not sure if he will retire early, but is glad he knows the impact it will have on their retirement lifestyle.
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
- Savings assumed to be salary sacrifice
- 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
** 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.
