How Much Do You Need to Save for Retirement?

In a country with compulsory superannuation, it is worth asking how much of each paycheck the average Australian needs to save for retirement. Is the current compulsory guarantee rate enough? Does it require additional contributions? And if so, how much?

The compulsory nature of super means many Australians can become disengaged from their own retirement outcomes. For instance, a large percentage of members in major super funds are in the default 'balanced' option, which allocates a significant portion to defensive assets. For many younger investors, this may be too conservative, especially if they don’t make additional contributions on top of the super guarantee.

How much should you save for retirement?

The obvious answer is that it depends. We all have different circumstances, and factors like having a paid-off house or the lifestyle desired in retirement will influence how much is needed. A common rule of thumb is that retirees should be able to replace 70% of their pre-retirement income.

Let's use a hypothetical retirement saver earning $100,000 as a starting salary, with 40 years in the workforce and wages increasing at 3% annually.

If they contribute only the super guarantee (11.5%) and are invested in a 'balanced' option earning an average of 8.07% annually, they may only be able to replace about 50-63% of their income. This outcome assumes continuous employment for 40 years, which isn't realistic for everyone. To reach the 70% replacement goal in this scenario, contributions of around 13-16% would be needed.

What if returns are higher?

Now, let's assume the same saver is in a 'high growth' option earning an average of 9.04% annually. A return of just under 1% more per year can make a big difference over the long term.

In this case, the saver could replace nearly 80% of their income at retirement. This demonstrates that for long-term investors, asset allocation is one of the largest contributors to the returns you achieve.

What return are you actually getting?

Many investors unfortunately don’t achieve the headline returns of their funds. This isn't just a question of investment strategy; it's often due to factors that detract from returns, such as high fees, unnecessary transaction costs, or behavioural mistakes.

Some investors are too confident and try to time the short-term movements of the market. Others are too conservative and don’t understand that the real risk is not having their portfolio grow enough over the long term.

It's crucial that anyone saving for the future ensures they aren’t negating their efforts with unnecessarily low returns. A hypothetical 10% return can be significantly reduced by fees, taxes, inflation, and poor investment behaviour, resulting in a much lower real return.

The takeaway is that to achieve a comfortable retirement, it is sensible to consider saving more than the compulsory minimum. Life is full of unknowns, but you can control how much you save and take steps to limit the things that reduce your investment returns.

Source: How much do you need to save for retirement?

 

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The information on this website is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation and needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS) or other offer document prior to making an investment decision in relation to a financial product.