Meeting the challenges of retirement income
Meeting the challenges of retirement income

Many Australians remain unprepared to tackle the risks of retirement despite Australia’s superannuation system being one of the largest in the world with approximately $2 trillion in assets.

The average super balance at retirement is estimated to be just c$200,000 for men and c$100,000 for women, although the average couple is estimated to require just over $640,000 to ensure that they can live comfortably in retirement. The table below will give you a rough idea of how much money you should need to support a modest or comfortable retirement. It applies for people retiring at age 65 who will live to an average life expectancy of about 85 and assumes full home ownership.

Another way to estimate how much money you will need in retirement is to assume you need 67% (two-thirds) of your income before you retire in order to maintain the same standard of living in retirement. This estimate is only suitable for above-average income earners.

The Association of Superannuation Funds of Australia (ASFA) estimates the lump sum needed to support a  comfortable lifestyle for a couple is $640,000 (or $545,000 for a single person). ASFA also estimates that in order to support a modest lifestyle, which assumes half an Age Pension ($300pw for couples and $200 per week for singles), the lump sum required at retirement for a couple is $220,000 (or $140,000 for a single). 

At retirement, you will likely depend on your: 

  • Retirement savings through Superannuation

  • Entitlements through the Age pension, and

  • Personally held assets.

The assets you accumulate within and outside superannuation will determine your Age pension entitlements. The number of government funded retirement options will gradually reduce over time. This makes it increasingly important for more Australians to begin proactively planning for their retirement.

ASFA Retirement Standard 

Living Costs - Couple 
  Annual Weekly
Modest $34,064 $653
Comfortable  $58,922 $1,130
Living Costs - Single 
  Annual Weekly
Modest $23,651 $454
Comfortable $42,893 $823

Key proposed changes to the superannuation landscape

The proposed removal of the tax free status for transition to retirement (TTR) pensions will negate tax advantages for most clients wishing to draw a tax free pension. The TTR pensions will likely become a last resort for those approaching retirement and wanting to reduce the hours they work and help them draw a pension to supplement their earnings. 

If the lifetime limit of $500,000 on non concessional contributions (accruing from July 2007) is legislated, it will close the opportunity to make ongoing lump sum transfers of personal funds to the tax effective environment within superannuation. Taken along with the Pension cap of $1.6 million this means that no longer will funds above $1.6 million be able to claim a tax free treatment on earnings. All excess funds will have to be held in a separate accumulation account. For high income earners, over $250,000, the superannuation contribution tax rate will double to 30%. 

While it is true that changes will bring about a relaxation on the age restrictions allowing individuals over age 65 to keep making contributions to super, the amounts that you will be allowed to contribute to superannuation through your pre tax dollars will be restricted by a lower cap of $25,000 regardless of your age. This will require individuals to actively commence retirement planning much earlier. 

It has been proposed that individuals (with superannuation balances below $500,000) will be able to make catch-up concessional contributions to superannuation. However, depending on the underlying income and expense levels this is unlikely to assist more individuals in accumulating a larger superannuation balance.

For part pensioners, another big change is the doubling of the reduction rate from 1 January 2017. This means that the rate of reduction of the pension will double when the pensioners assets are over the minimum threshold. As a result of this, a lot of age pension reliant couples and individuals will receive a lower than usual age pension after 1 January 2017. 

For annuities, a greater component of the initial capital will be required to be repaid as an annuity. This is supposed to gradually reduce to zero over the life expectancy of the individual. Clarity around these rules has yet to be received and products will accordingly have to be tailored to cater to these minimum requirements.

The anti detriment payment was a benefit paid to beneficiaries reimbursing the contribution tax paid by the deceased member while working towards retirement. This reimbursement will cease from 1 July 2017.

Hence, it is increasingly important you seek professional advice to ensure you are able to achieve your retirement goals.

Source: Patersons Research

Note: This article is intended to provide general advice only, and has been prepared without taking account of your objectives, financial situation or needs, and therefore before acting on advice contained in this document you should consider its appropriateness having regard to your objectives, financial situation and needs. If any advice in this document relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Product Disclosure Statement for that product before making any decision.