How do you know you have enough super?

It is a tricky question. None of us know how long we’re going to live, how the market is going to perform until and through retirement, and the sequence in which that is going to happen. We don’t know if we’re going to have costly chronic illnesses, or how inflation is going to impact the cost of goods and services.

This does not mean that we should not try to be as accurate as possible when estimating what we need for retirement. This allows us to plan towards a goal and adjust when we receive more information that clarifies our path.

I’ve outlined some of the variables that impact retirement outcomes and how traditional standards may not be applicable. I also go through the most common measures that investors use to estimate how much they need for retirement and why you may need a more customised approach.

How retirement has changed – and why you will need more

People are living longer

Many people are retired for almost the same duration as their working life. Longer retirements mean more time is spent with chronic illnesses that require costly specialist appointments and care. Retirement is costing more while lasting longer.

You may want to retire earlier than 65

Your super balance is locked away until your preservation age. If you want to retire at 50, you’re going to need savings outside of your super balance. Instead of focusing on superannuation as your plan instead see it as one tool to support your retirement.

Inflation

Inflation reduces the purchasing power of your money. If you think $1 million is enough for you to retire in 2026 the equivalent spending power will be worth $610,000 in today’s dollars in 20 years (with a 2.5% inflation rate). If high inflation continues today’s dollars will be worth even less.

Sequencing risk

The sequence of returns drastically impacts your outcome. While you can’t control the level and order of market returns you can control your additional investments into superannuation and your asset allocation. Focus on what you can control. More on this below.

Your lifestyle

You may save and sacrifice to have a leisurely retirement. You may want to travel or take up hobbies that add to your spending. You may downsize or move to a cheaper location. A key part of your retirement plan – and how much it is going to cost - is how you envision your golden years.

Career breaks or reduced work

You may need to account for career breaks or reduced work hours that will require additional savings. Don’t forget to include likely scenarios in your planning.

It is more likely you may not own your own home

Many of the industry standards and guidance for retirement savings assume you own your own home. With housing affordability a national issue, many Australians are retiring as renters or without having paid off the mortgage. I’ve written an article on what you may need in retirement if that is the case here.

Common ways we measure what we need in retirement

There are a few ways that Aussie investors track progress. The inadequacy of these back of the envelope checks may contribute to retirement shortfalls. A few common methods investors use:

  1. A finger in the air. Pulling a round number out of thin air. $1 million plus owning your own home is a common yardstick.
  2. Looking at the average balance for their age and using that as a guide. At my age, that is $44,053 (The Association of Superannuation Funds). Many people think they are fine as long as they keep up with the age-based bracket amounts as they age. Women are retiring with $380,000 on average.
  3. Looking at what the industry says. ASFA’s retirement standards says a comfortable retirement can be achieved with $630,000 for a single person who owns their own home.
  4. Looking at current spending and using that as a guide. A Vanguard study has revealed that millennials estimate they will need $100,000 of income in retirement. A common rule of thumb is saving 25 times estimated annual expenditure. That puts you at $2.5 million.

$1 million? $380,000? $630,000? $2.5 million?

There are issues with each of these sense checks. None take you or your circumstances into account. Most of these measures, likely meaningfully underestimate what many people will need for a comfortable retirement.

Comparison can also leave you discouraged and confused as you looked at different measures of retirement progress. The purpose of measuring what you need in retirement is to give you an actionable goal that informs your decision making. This goal can be adjusted as your circumstances in retirement become clearer. The important thing is that it is specific to you and not based on measures that have nothing to do with your actual spending needs.

How to set a guideline for a realistic number

Sometimes it’s worth working backwards with a focus on what you can control.

Start with the life you want in retirement instead of an arbitrary balance. What does a typical week look like? Are you travelling, dining out regularly, supporting family or living more simply? Do you have a mortgage, are you renting and have you transitioned fully out of work?

From there, translate that spending figure into today’s dollars. One factor you may not need to account for is tax as many retirees pay lower tax rates in retirement. You also no longer need to account for superannuation or retirement savings. This number becomes the foundation of your plan.

Next, consider inflation and how long your retirement may last. There are some tools that allow you to estimate your life expectancy based on your lifestyle factors. This approach may provide a more accurate estimate than the average life expectancy. One example is from National Seniors. Think about when you want to retire, and whether you will need to bridge the gap until you can access your superannuation.

Then, stress test your assumptions. Mark has spoken about Monte Carlo simulations before as a tool to increase certainty in your retirement. What happens if markets underperform early in retirement, or if you take time out of the workforce? What happens if your expenses are higher than expected due to illness? You’re not able to predict everything but you can build flexibility into your plan. Consider the factors outlined above and whether they apply to you.

From there, you can make decisions that actually move the needle. Once you have a goal you can explore how much to contribute, how much to invest and what trade-offs you’re willing to make today.

To run through the process, we have a detailed guide to come up with a number. Using that in conjunction with some of the changes in retirement planning I’ve outlined should help you come up with a more accurate view of your retirement needs.

Next steps

You likely have a number in your head for what you need for retirement or the amount you should have saved now. Compare it to the number that you get at the end of this process.

  1. Estimate your annual spending in retirement, considering the above factors. Build in a buffer for flexibility.
  2. Check your current super balance and contribution rate
  3. Use a calculator, such as Moneysmart, to calculate where you’re heading.
  4. If you are not on track, identify ways that you can get closer to your goal – adjusting your asset allocation, increase your contributions or build savings outside of superannuation.
  5. Review as circumstances change.

A rough plan that is reviewed and refined over time is far more powerful than chasing a number that was never designed for you. Build a system that gives you the best chance of funding the life you actually want, in a new environment.

Invest Your Way

For the past five years, Mark and I have released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

We’ve shared our journeys with you, and you’ve shared back. We’ve listened to what you’re after and created a companion for your investing journey – Invest Your Way. Invest Your Way is a book that focuses on the investor, instead of the investments. It is a guide to successful investing, with actionable insights and practical applications.

If anyone would like to support this project you can buy the book at the below links. It is also available in Kindle and Audiobook versions. Thanks in advance!

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