Why $1 million in Super is not enough for retirement

If you believed that $1 million in superannuation would be enough money to last you for retirement then you need to think again.

According to Challenger’s superannuation industry veteran and chairman of retirement income, Jeremy Cooper, if the $1 million in super was used to purchase a lifetime income in the current interest rate environment, it would achieve around $1,297 a fortnight – the same as the government pension.

"The brutal reality is that a fair price for an age pension in today's interest rate environment is around $1 million. For that amount, a couple will get $33,717 of income a year. A comfortable retirement would cost more."

The recent government’s intergenerational report suggests that by 2055, Australians’ life expectancy will climb to 95.1 years for men and 96.6 years for women. Currently the life expectancy for those born today is 91.5 for men and 93.6 years for women.

With an increasing life expectancy combined with couples having fewer children, it is becoming increasingly more important that retirement planning is thought about, especially when there will be a higher percentage of people that the workforce will have to support.

With the low interest rate environment, investors nearing retirement are wise to worry as the low interest rates can severely affect their returns. This is particularly true for those looking to take a large sum windfall rather than a steady income.

Mr Cooper also states that, "In the quest to ensure our super taxes are equitable, there's the potential for heavy collateral damage to be sustained to a large cohort of the people we're trying to help. These are the middle-income households hoping to accumulate sufficient nest eggs to mainly self-fund a reasonably comfortable retirement”.

However not everyone agrees that $1 million is insufficient for retirement, in fact $1 million could be more than plenty. It all depends on every individual’s circumstances. If you prefer to take a holiday abroad twice a year and eat out regularly then yes you will probably need more than $1 million. It also depends on how long you will live, any serious health costs and how soon that money will run out.

Pauline Vamos, chief executive of the Association of Superannuation Funds of Australia, also believes that $1 million will not be enough money to lead a comfortable retirement. To help the situation, she believes that super assets below $2.5 million should remain un-taxed in order to help boost savings. She also says that currently there is not enough focus on setting up reliable income streams and this needs addressing.

According to modelling done by ASFA, couples might be able to retire comfortably on $500,000 each in their accounts and if they owned their homes. However, with low interest rates in play this no doubt will have an impact on returns and may mean you might not have enough for the future.

With housing prices already becoming more and more unaffordable in some areas of Australia, this could even mean that come retirement, some people may not even own their own home.

It is important that we take steps now to ensure that we can support ourselves financially. With an ever growing population that is ageing, who knows whether there will be any money left over in the pot for our retirement or our children’s.
Published on 10th of June 2015 by Marty Stanowich
Marty Stanowich
Marty Stanowich

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