How long will your super last after retirement?

The compulsory superannuation contribution rate is set to increase by 0.5% each year for the next six years (i.e. from 9.5% to 12%) beginning from 1 July 2021. It is understood that the Federal Government is considering postponing next year’s increase, due to concerns about whether the economy can afford these higher employment costs and at the same time as deal with the current economic challenges.

A lot of the commentary about superannuation, including whether next year’s contribution increase should be postponed, is often motivated by political and vested interests. Therefore, I thought it would be useful to cut through this rhetoric and focus on the facts alone (i.e. maths).

In particular, I wanted to focus on two questions; (1) how long will your super last after retirement, and (2) how important are higher contributions compared to investment returns and fees.

How long your super will last depends on what you spend

Obviously, a key determinant of how long your super balance will last is how much you spend. The less you spend, the longer your money will last – no surprises there!

The best way to assess how much money you will probably need in retirement (to maintain your current standard of living), is to base it on how much you spend today. Of course, it is likely that you will spend your money on different things, but the aggregate amount tends to be very similar (between when you are working to when you are retired).

This table sets out what people tend to spend, based on my experience. The rule of thumb is that living expenses (see my definition of General Living Expenses here) tend to be in the range of 40% and 50% of your gross employment income (but typically not less than $50,000 or more than $150,000).

Comparing annual contribution levels of 9.5%, 12% and 15%

In my analysis, I measured the impact of a 30-year-old contributing a total of between 9.5% and 15% of their income each year for 30 years i.e. until they are age 60.

In most circumstances, contributing 12% or more of your income each year had a material impact on the longevity of super. In fact, for higher income earners that are 20 to 30 years from retirement, it was a magic bullet. That is, it would likely give them a sufficient super balance to fund their whole retirement.

Comparing investment returns of between 6.9% and 8.5% p.a.

I compared investment returns produced by the top 8 industry super funds for the last financial year in this blog. Based on data to the end of August 2020, 10-year returns ranged between 6.9% and 8.5% p.a. That is a large range i.e. 1.6% p.a. and it makes an enormous difference, particularly for higher income earners.

Picking the best fund out of the top 8 versus the worst, could be the difference between your super running out in your early 70’s versus it lasting for the rest of your life. It is important to note that the top performing fund will probably change over time, which is why it’s important to proactively manage your super (to ensure it is always invested well).

Comparing fees levels of 0.6% and 1.0% p.a.

Whilst super fees were important, they were the least important factor of the three compared. That is not to say that you shouldn’t actively reduce the super fees you pay.  

What are my findings?

The chart below (click to enlarge) sets out my findings. I compared three scenarios:

  1. A situation where a family has minimal surplus income and therefore little capacity to make additional super contributions. In this scenario, I assumed total family income of $150k and living expense of $75k p.a. The number one factor to focus on in this scenario is ensuring they maximise investment returns. Doing so could result in their super lasting well into their 90’s.
  2. Higher income and average expenses i.e. family income of $230k and living expenses of $95k p.a. It is important to note how sensitive investment returns are. Making additional contributions were important too, but arguably unnecessary if long term investment returns are maximised. 
  3. High income but also high expenses i.e. family income of $340k and living expense of $150k p.a. The key observation in this scenario is; if you want to spend an above average amount in retirement, you must contribute an above average amount whilst you are working.

How much super should you have today?

You can apply the findings of this analysis to your situation even if you are materially older than 30 years today, as long as your super balance is on track.

As an indication, your family’s total super balance (i.e. both spouses) should be in the following ranges to be considered “on track”:

  • 30 years old – between $40k and $100k.
  • 40 years old – between $300k and $400k.
  • 50 years old – between $600k and $800k.

If your super balances are in the ranges provided above, then pick the scenario that best reflects your circumstances and apply the conclusions I have set out.

What should you do if your super balance is low?

If your super balance is less than the indicative ranges provided above, then it’s likely you will have to implement both tactics; (1) maximise your contributions and (2) maximise investment returns.

However, be warned that you probably still won’t have enough super. It may allow you to fund the first 15 years of retirement i.e. until mid 70’s. As such, you must implement additional investment strategies (outside super) such as share market or property investing. If not, you must come to terms with having a lower standard of living in retirement.

Are there better things to do other than make higher contributions?

Making additional super contributions is a worthwhile tactic, especially if you commit to making them over long periods of time. However, depending on your circumstances and goals, it may not be the most effectual use of surplus cash flow, particularly in a low interest rate environment. Also, like with lots of things in life, diversification is a good idea. Spreading your wealth in and outside super reduces the risk that your retirement plans will be adversely impacted by a change in super rules.

Holistic, long term planning is important

This demonstrates how valuable it is to formulate an astute, well-considered, holistic wealth accumulation strategy. Having such a strategy gives you the confidence that you are doing all the right things at the right time. And as the analysis above demonstrates, that can have a substantial impact on your lifestyle and retirement.