Is $1m in super too much?
As part of its recent rubber-stamping of the FSI recommendations, the Government has announced its intention to enshrine in legislation the objective of the superannuation system. This will provide absolute clarity to funds as to their explicit purpose, which is likely to be to provide retirement incomes to substitute or supplement the Age Pension.
So far, not very controversial. But, let’s also consider what’s not included – namely, that super is not intended to be a concessionally taxed vehicle for intergenerational wealth transfer. This acknowledgement might pave the way for further reductions in concessions for members with higher balances or incomes.
This begs the question: how much super is enough?
The popular notion is that retirees need a balance of $1 million (or more) for a comfortable retirement. That this is conventional wisdom was made clear to me over the weekend when some builder friends at a BBQ wanted to check that ‘$1m is still the right number’ to be targeting. As an industry, we’ve done little to dissuade the population of that notion.
Whilst there is no doubt some will need more than $1m to maintain their lifestyles through retirement, it seems that given average balances of <$200k at retirement, a focus on such a high target is unhealthy and does nothing to increase members’ engagement with the superannuation system.
Our view is that the figure at which superannuation can substantially achieve its’ soon-to-be enshrined purpose for most Australians is in fact much lower. A balance of $1m could provide an income of around $65,000 pa. Being tax fee, that’s the equivalent of an annual salary of about $95,000, more than $18,000 pa in excess of average wages1.
The ASFA Retirement Standard specifies the annual retirement income required to support either a comfortable or a modest lifestyle. We’ve taken their higher estimate, about $43k for a single person living in NSW or Victoria and enjoying a comfortable (but not luxurious) retirement. For example, it allows about $5k per year for travel – almost enough for an annual European river cruise.
To achieve an income of $43k, a single person needs to draw down $20k per year from super, on top of the full Centrelink age pension. A retiree can achieve that drawdown amount – and therefore a comfortable retirement – with a well-managed balance of around $310k. And the good news? Within the decade the average person who has worked full time since the system began in 1992 will actually have that balance or more.
To be clear, we’re certainly not proposing a limit on super balances of $300k. The benefits for individuals and the nation of encouraging super accumulation are indisputable and higher balances substitute, rather than supplement, the Age Pension. But we should encourage people towards an achievable target of $300k or so and be clear about the difference it can make to the standard of living of an average retiree (queue the picture of a river boat on the Danube…).