Have you saved enough?

Controversy over whether or not an average couple needs $1million in super to retire comfortably misses the point that, for many, this is an impossible target. If anything, the challenge of funding a comfortable retirement has become more difficult because of lower interest rates, volatile investment returns and the latest asset test changes.

Even for middle and higher income earners, the obstacles to funding a comfortable retirement are considerable, especially now that many retirees can expect to live into their late 80s.

Remaining employed until late 60s involves funding retirement for a minimum of 20 years.Retiring at age 60 requires capital to fund a 30-year or longer retirement.

Assuming an investment return equal only to inflation, a capital sum of $1.2 million would provide a modest real income of $40,000 a year, only $6000 above the maximum age pension for a couple with modest assets. In the past, higher investment returns together with partial access to the age pension helped many Australians fund a comfortable retirement with smaller amounts of capital.

With a 3 percent real return above inflation a starting capital of around $940,000 would fund an annual real income of $40,000 for 30 years. These calculations assume that during retirement, the capital is run down slowly at first but much more quickly at later ages.

For sound reasons, people are reluctant to draw down their capital not least because of the uncertainty of how long they will live.

Current age pension rules providing access to a part age pension to people with considerable assets discourage retirees from drawing down their assets too quickly. But after January 1, 2017, harsher asset test changes apply. A 7.8 percent annual asset test taper rate will reward many retirees using up their capital with a larger part age pension entitlement.

Even if investment income remains totally tax-free as superannuation pensions currently are, reducing assets to qualify for additional age pension will provide a superior and more certain return.

Put simply, whereas retired couples had an incentive to build up their assets to in excess of $1 million, from 2017 onwards a lesser target of half that amount together with a part age pension will provide a higher income.

There is a clear message for people currently planning ahead for retirement. Superannuation savings in excess of around $500,000 will be far less beneficial than they currently are.

Because of the asset test exemption, the first priority will continue to be to own the family home outright. Then if larger super balances are available, they can be used to fund early retirement or higher levels of expenditure in the early part of retirement.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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