Will we be OK in old age? How much will we have?
One of the great things about living in Australia is superannuation. Our employers are required to pay into an investment account for our retirement.
In recent times, my wife and I have been in several conversations with friends who are wondering (or worried) if their balance will be enough. That's what inspired this article.
Great question
It's a great question to ask, especially around the age of 35 to 40. At that point, old age is less of a distant abstract concept. It's becoming a medium-term reality.
At 35 the number of years of living off super is possibly more than half of your remaining years.
At 40 you may consider yourself about half way through your working life. Looking at your balance, it's easy to think that twice that balance may not be enough.
Read on, because I have good news for you.
It's better than you might think
As I've mentioned in earlier posts, compound growth means the investment grows faster and faster over time. Superannuation is a classic example of this because the annual profits go back into the investment to speed up the growth.
This is best displayed in this graph where the growth in the second half is the vast clear majority of the final savings.
Why is this?
Your current money does most of the work
The great part of investment maths is that so much of the work is done by the money you already have in there. So even if you're thinking of going part-time in later years, your superannuation will still grow well. More on that another time.
Let's put some numbers to it
Everyone reading this will have their own age, current balance, income, intended age to access super, retirement age, and intended quantity of work, etc. So that makes it a bit tricky
To simplify, I've based my calculations on 'years until access', meaning the difference between your current age and when you intend to access your superannuation.
I've assumed zero future additions. Yes this is very conservative. I prefer to err on the side of caution. Obviously future contributions will help boost the balance. But if you've been working through to 40, the majority of the final balance will usually come from the compounding growth of your existing balance.
As everyone will have a different balance, I've calculated a multiplier. Multiply your multiplier by your current balance (based on the growth rate and number of years you select). That will give you an expected balance.
If you're unsure what rate to select, your latest superannuation statement should tell you its long-term average growth rate.
So here's the table.
An example to recap
So, if you're 40, and intending to access your super from 60, your years until access is 20. If your superannuation account grows at an average rate of 8%, then 4.7 is your multiplier.
In that example, if you've got $200,000 now, then you could expect around $940,000 to be your final balance, even with no further contributions. If you continue to work and receive employer contributions, it should be even more.
Inflation
Prices of things generally increase over time. So the amount you've calculated may be worth a little bit less in the future than it would be today. It's hard to put a figure on that, but it's worth noting.
In short
I wrote this because I was seeing people (primarily around 35-40) completely in the dark as to how much they might have to retire on.
In the absence of information it's easy to start to fret about being poor in old age - and cling to the idea that we need to keep working fulltime into old age.
Having realised how much money grows when invested, we can have a better idea about how we're tracking. You might find you'll have plenty in retirement, or at least a comfortable amount.
If you do still think it's a bit on the skinny side, there's always the option to add more money voluntarily (pre-tax or post-tax) or to have other investments in addition to superannuation (particularly if you're looking to leave your job before 60).
Disclaimer
This information is general in nature and does not take into account your personal situation. It is not financial advice. If you need specific advice on your circumstances or finances you should speak to an expert.
Further reading
This post is part of my money maths series. Not financial advice, just demonstrating the maths of money. Other articles in the series include:
The rule of 72 - the easier way to work out investing gains
The magic of compound growth - investing might be better than you think
$200k for a coffee and a sandwich - how small regular costs add up
Good post. Yes, I'm definitely hearing more of my friends questioning their superannuation status now that we are in our late 30s.
ReplyDeleteI'd love to see you expand this post to show how to work out whether the amount you'll have in superannuation will be enough for your needs. Eg. If you expect to live for 30 years after you start accessing super and you plan to spend $40k per year, you would need x in your superannuation at retirement.
Hi Michelle. Thanks for that. Glad to hear that it's not just people I know, but that others in their 30s are thinking about their future.
DeleteThanks for the suggestion too. I considered it for a short time. At the moment I feel that's a bit too tricky for me to handle because there are just so many factors - even with a given retirement length and spending (like you've given). Is the $40k in today's money or in future dollars? If future dollars, how far away is that? 10 years? 30? What is the expected inflation rate over the next 10 or 30 years? (Experts can't even agree on that in the short term ;)
Is the 40k for a single or couple? Right now, a couple could do it easily using a small super as a supplement to an age pension. What will the age pension be in 2045? What will its eligibility rules be? It's just a minefield of assumptions and guesses.
So for now I'll leave that to financial planners. I'll just stick to the basics of showing how high school maths can help us understand our money.