How much do you need in your SMSF for retirement?

Founder and Publisher of the Switzer Report
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One of the surprising aspects of talking to listeners on my 2GB Super Show program each night is that a whole lot of people don’t know how much money they will need to be comfortable in retirement. Of course, when I ask the same question of the experts who join me on the show they often reply: “How long is a piece of string?”

I know some listeners are happy with $50K a year, while others think $35K is fine. I often hear financial planners say $1 million in an SMSF would be ideal and they use the rule of thumb that if you want $50K and you don’t want to eat into your capital, then $1 million invested for an easily gettable 5%, gives you the prized amount.

Funding your retirement

One of my guest experts on my radio show, Max Newnham, has recently written a book called Funding Your Retirement: A Survival Guide. He looks at the ‘how much do I need?’ question from his angle as both a chartered accountant and financial planner.

He says research shows 50% of baby boomers don’t think their super nest egg will bankroll their retirement and that their kids are set to be disappointed as their inheritance is expected to be downsized!

Newnham points out that the old rule says that if your employment income is $100K a year, then you’ll want about $75K a year in retirement. He argues that once a 60-year old retires and takes a pension, there’s no tax paid, hence less gross income is needed.

For accuracy’s sake, he suggests you first need to work out how much you need now for your current lifestyle. You then need to imagine retirement and forecast what expenses will rise and fall.

For example, takeaway lunches might become a lesser expense, but travel and accommodation could be more expensive. Newnham effectively argues that you should create a pre-retirement plan that covers your assets, liabilities, income, projected income, your retirement life plans, any debt reduction goals, and gifting plans.

It’s about visualising the future and then coming up with the plan that will make that future more comfortable.

Crunching the numbers

In the past, the Association of Super Funds of Australia (ASFA) has surveyed retirees who said they wanted 66% of their pre-retirement income in retirement. So if you were on $100,000, you would want $66,000 in retirement. But here’s the catch: to make that happen ASFA says you would need to save, via super, around 15% of your income for 40 years!

This always shocks people, but it is the strongest case for 40-year-olds or 50-year-olds to salary sacrifice.

ASFA says a single person should live a comfortable life on $40K a year, while a couple would want $55K a year. This should give you decent travel, health coverage and an ability to buy, say, better cars. A basic retired life comes with a pension of $18,962 for singles and $28,584 for couples. A modest life comes in at $21,587 for a single while a couple needs $31,263.

For a ‘comfortable’ life in retirement, the number crunchers say a couple wants a nest egg of about $840,000 when they retire at age 65. For a ‘modest’ retired life, the amount would be about $480,000 for a couple and $335,000 for a single. These figures include the belief that access to a pension is expected.

Clearly, success with everything hinges on having a clear goal of what you want to achieve – that is, a super lump sum target – and then making sure you make it happen by doing everything right every day of your life. It’s called the Law of Process and it explains why great athletes, great business builders and great wealth generators make their dreams come true.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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