According to ASFA a couple needs around $800,000 to retire comfortably However, what we don’t often discuss is the valley of super-pain in between these two figures.
Now, most Australians should not panic about funding their retirement. We have the third best system in the world. You will be OK. However it is not just a simple ‘the more you put in the more you get out’ equation.
There is a considerable ‘valley of pain’ which is super’s dirty little secret.
To get the most out of the super system you need to make a decision: ‘go hard early’ (and for longer) and be self-funding (no social security except in dire circumstances) - or just sit back and expect the Super Guarantee and Centrelink fund your latter days.
The sad reality is there is very little benefit in retiring with a balance between $800,000 and $1.2million. You might as well have put this money into other assets, in particularly your capital gains tax free home – so long as you are prepared to downsize later, when required.
Yes, your cash is tax effectively accumulated but the legislated restrictions mean you can’t touch it until a retirement event occurs after 60 (assuming you are not permanently disabled or pass away earlier!).
So what about a couple with say, $1.5m in combined retirement funds?
Under our present system, they may have actually over-saved as they will not significantly benefit from the super system until their own money runs down to around $800,000 (approx. $200,000 below the Centrelink Asset threshold) and will begin receiving part age pensions (approx. $16,000 pa for a couple on that level of assets) to supplement their own Tax Exempt, Super/Account Based pension income.
Once you hit the $2m mark in super savings as a couple, you are at the beginning of the ‘sweet spot’. And bear in mind the Transfer Balance Cap is now $1.9m each – so almost $4m together. So as the saying goes “aim for the moon, even you miss you’ll be amongst the stars!”
Your money in Account Based Pension will be 100% TAX FREE. If you have $1.9 m you will receive at least $95,000 pa tax-free, indexed over time and you won’t run out of funds till well over 100 years of age!
In simple terms, if you have $2m or more in super you are unlikely ever to need or qualify for Centrelink support and with a cash-out-and-recontribution strategy, your estate will receive the full amount of remaining capital.
You might mistakenly think I am anti-social security here. I am not. For around 80% of retirees Centrelink is the great backstop for all Australian retirees. It cuts in when you have run your assessable assets (excluding your home, so long as it’s on less than 5 acres and not used for business) down to around $667,500 for a single and $1,003,000 for a couple.
And by the way, the maximum age pension applies if your assessable assets are at or below $301,750 for a single and $451,500 for a couple.
$400,000 invested for a couple inclusive of Centrelink pensions, will generate a tax-free income of around $66,500 pa combined– which many say ‘we can’t live on that!’ however it is most likely to occur if you are fortunate enough to be elderly, a time when people spend far less on travel and entertaining themselves.
(The important thing here to remember is that figure above is tax-free. When you think about it, after all the outgoings from the standard pay-packet, that’s like having a gross income of $90,000. There are probably a million nurses and schoolteachers raising families on that sort of income.)
If you feel like you may retire in this financial ‘Valley of Pain’ see your financial adviser and design a strategy to beneficially reorganise your structures. It may be increasing your partner and your balances to $55,000 per year together via maximising your annual Concessional Contributions or, or ensuring the largest balance is held by the older partner and applying a part Centrelink and part self-funding strategy.
Alternatively you may decide to retire early at age 60 self-fund your early retirement and glide int part age pension and part self-funded pension at or after age 67!
Or it might be that you are advised to downsize – and to inject $600,000 into your super (and this can be a temporary strategy, of course and it can only be done once.)
The important point here is to get your financial advisor to project your super balance for you – against a projected super cap limit informed by inflation, while you are in your mid 40’s, 50’s and a few years before retirement. That way you will know where you are roughly likely to ‘fall’ – in the sweet spot, on either lip of the Valley of Pain – or smack in the misery zone. Then you will have time to take action!