Fri 12 Jan, 2018

Could You Outlive Your Retirement Savings?

The retirement savings model in most developed countries is much the same. You begin working in your teens and continue well into your sixties, perhaps taking a break or two to travel, study or raise children, before settling down on your life savings. In an ideal world, you’ll have paid off your mortgage, and between you and your spouse have saved up enough to support you for a further twenty or so years. Sounds like the life, doesn’t it?! Perhaps not. Startling new research has predicted that by the year 2055 there could be over 40,000 Australians over 100 years of age. So, what happens if you’ve enough superannuation to support you until you’re 90, but you live to 105? Most of us expect retirement to be filled with long walks, lots of reading and dishing out cash to our grandchildren, but with life expectancies soaring, we might be in for a much bleaker outlook.


The question of whether your superannuation will cover your retirement or not is known by experts as ‘longevity risk’. With speculation around whether governments should increase taxes on younger generations or reduce benefits to retirees to unlock the funds required to support our longer lives, the responsibility is falling on Australians to grow their superfunds themselves.

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How much will I need for retirement?

The amount of super you need for retirement varies dramatically depending on your lifestyle goals. According to ASFA, a couple can live a modest life in retirement on $34,506 per annum, while a ‘comfortable’ life comes in at around $60,000 per annum. For singles, you’re looking at $24,250 and $43,665 respectively. Depending on whether you’ll receive the age pension, the lump sums required to provide these annual incomes can soar past the $1million mark. Scary, right?


Another way to estimate how much you’ll need in retirement is to calculate 67% of your pre-retirement income. If you want to delve deeper into what your retirement might look like, why not draft out multiple scenarios, and tot up how much they might cost you.


For example, one scenario could be two holidays per year, 3 meals out per week and regular indulgences in your supermarket shop. The other end of the spectrum could be budgeting in your weekly shop or choosing a discount supermarket, sacrificing holidays and reserving dining out for special occasions. Remember, you’ll have more free time on your hands, so be realistic with your lifestyle expectations. There’s every chance you’ll find more ways to spend money when you’re not trotting off to work every morning.


I don’t have enough. How can I catch up?

Before you begin picturing retirement life from a cardboard box, void of the golf retreats and whiskey tasting parties you’d dreamt of, being prepared is the number one way to negate the longevity risk. There are a number of strategies you can employ to grow your superfund beyond the baseline employer contributions.


Make voluntary contributions


Making voluntary contributions is the simplest and most obvious way to grow your fund faster. Not only will you be saving more of your income, you’ll enjoy a tax benefit, as all super contributions are taxed at 15%, rather than your regular income tax bracket of up to 47%. The earlier in your life you start salary sacrificing, the better, as you’ll enjoy the magic of compound interest. It doesn’t need to be a lot – over 30, 40 or even 50 years, even the smallest sacrifices can add up to big savings.


Manage your own superfund


If your super returns aren’t hitting the mark for you, there’s always the option to take control of your own investments. Self-managed superfunds aren’t the minefield they once were – though there’s still a stigma around the concept. Contrary to what you’ll hear, you don’t necessarily need to have a minimum of $200,000 in your fund, nor do you have to fork out thousands on fees.


Managing your own fund can give you the freedom to invest in whatever you like. Residential property, stocks, businesses, commercial property – you name it. Taking control of your investments may allow you to build a bigger retirement fund, and contribute to your retirement income beyond just your lump sum. As life expectancies continue to rise at a staggering rate, many are suggesting that would-be retirees should be looking at ways their superfund investments can provide ongoing income. Taking control of your superfund and commencing an SMSF can allow your fund to buy properties that can yield rental income month after month, well into your retirement. Funds can then sell the property later in retirement to unlock a lump sum to provide financial support for many more years.


Here at Squirrel, we’re empowering more people to take control of their superfund with an SMSF. Silencing myths that SMSFs are reserved for high net worth individuals, we want to help more people grow their retirement savings themselves, and take a more active role in their investments. Our expert team of support staff is on hand to help you commence and administrate your SMSF, getting you on the path to superfund success.

Find out more about managing an SMSF and building your wealth for retirement by downloading our eBook.