YOUR SUPER - HOW MUCH IS ENOUGH?
One of the toughest questions I get asked as a financial adviser is “How much Super is enough?”
It’s tough because it involves trying to answer a whole bunch of questions about the world in up to 40 years’ time. How much will you want to spend in retirement? How long do you plan on living? How much will you earn when you are 65? What will inflation and interest rates be doing then?
These questions simply cannot be answered, because the human brain is simply not equipped to deal with events that might happen in 40 years’ time.
The media and the finance industry typically claim you need $1M to retire comfortably. This is based on the investment needed to generate an income of $58 000. Why $58 000? Well that is what the Association of Super Funds in Australia (ASFA) claim is what a couple need to have a comfortable lifestyle.
This income is more than what 60% of Australian households earn. Is it right for you?
What’s more relevant is that it is of absolutely no help in helping you assess whether you are on track with your Super savings unless you are close to retirement now.
So how do you know if you are on track?
The easiest way to do this is to look at your Super balance as a number of months’ (gross) pay. Grab your Super Fund statement and your payslip. Divide your Super Fund balance by your gross monthly pay (that is before tax and excluding your Super). For example if your Super balance is $50 000 and you earn an annual salary of $60 000 (or $5 000 per month), your Super Fund balance represents 10 months’ pay.
At LifeSherpa we have developed a benchmark for how many months’ pay you should have in your Super Fund at each stage of life.
Here’s what it means in practice
A typical graduate starting out in the workforce in 2014 will earn a salary of around $50,000. Each month their employer will pay around $320 (after tax) in Super contributions.
Each month the balance also earns an investment return. Over time the contributions and the earnings really add up.
By age 27, the balance should have reached 6 months’ pay. 5 years later (at 32), the balance should be 1 years’ pay.
By age 33, the monthly earnings should exceed the monthly contributions. The effect of compounding is becoming visible.
By 40, you should have 2 years’ pay and 5 years by 55.Now try it for yourself. How is your balance?
|Years to Retirement||Age||Super Balance (in months pay)|
Vince Scully | LifeSherpa
With over 25 years in Financial Services from consulting to management, Vince Scully is the go-to guy for wealth management and financial advice. Vince founded the Calliva Group; a fund manager, product issuer, advisor and lender to Government and private clients. Vince is an advisor to the Wealth Management Industry, and prior to his role as CEO at Calliva, a senior member of Macquarie bank’s infrastructure team.