Are my employer superannuation contributions enough for retirement?

Without doubt, retirement planning and superannuation can be extremely boring. However, putting plans in place early in our working life can mean the difference between struggling to get by on the age pension, and having a more enjoyable retirement that enables us to enjoy some of life’s luxuries.

The superannuation guarantee (SG) system was introduced back in 1992 with the idea that employers would make compulsory contributions to superannuation on behalf of their employees. This would enable employees to accumulate savings over their working life, and become less reliant on the age pension in retirement.

But will the SG system, on its own, provide for a comfortable retirement lifestyle?

Let’s consider Sarah, a 24 year old who is entering fulltime employment for the first time. We will see where her SG will take her over the course of her working life.

Sarah’s starting salary is $40,000 per year, and will be indexed during her working life. Her super fund charges a fee of 1.5% per annum, which includes financial advice fees, and insurance premiums of $200 per year, that will increase as she ages. Her employer contributes the amount prescribed under superannuation guarantee law. For the sake of this example, we have assumed Sarah is a “growth” investor and receives an investment return of 7.9% per annum. 

After running some projections, we find that Sarah’s super will have grown to approximately $1.3 million by the time she retires at age 67. On the surface that looks like a pretty good result. However, if we adjust this for inflation (of 2.5% per annum) that is worth just over $240,000 in today’s dollars. OUCH!

Incidentally, we have assumed that Sarah works continuously to age 67 and has not taken career breaks to raise a family or travel overseas.

Assuming Sarah is a single person, the next question is, what sort of retirement lifestyle could Sarah expect if she retired today with superannuation savings of $240,000?

If Sarah looked to receive an indexed retirement income of $43,000 per year, Sarah’s superannuation would run out by the time she turns 81. And this assumes she has been entitled to an age pension from retirement.

A rather bleak outlook indeed. No wonder people are disengaged with their super.

At this point many will be asking, why bother with super? But, with careful planning, there is hope for Sarah and people just like her.

If Sarah had arranged with her employer to forgo 5% of her salary and have it contributed to superannuation along with her SG contributions, her super would grow to just under $2 million, or $356,000 in today’s dollars.

Based on an indexed retirement income of $43,000 per year, her super would last an additional ten years, until she is 91!

It is never too early to start planning for retirement. And though it may be 40 plus years away and seem as real to you as the Easter Bunny right now, it’s important you take good advice and don’t assume employer contributions will provide for the lifestyle you want.

Note: Projections used in this article were derived from calculators available from NetActuary. Figures are current as at 1 November 2015

The Realise Your Dream blogs are written by Peter Kelly and Mark Teale. More information about the authors can be found here