How much is enough?

Last month I ran a course on Superannuation. There are a few things that often come up when the conversation about super is started.

It is often one of the most misunderstood investment structures, as some people think of this tax shelter as an investment product, so when they see a negative return on their superannuation statement they think that super is too blame.

A negative performance result comes from the financial product that you are invested in, be it cash, fixed interest, property, shares or international shares, superannuation is not to blame.

The confusion comes from the fact that superannuation is the most changed legislation in Australia’s history, with at least 151 pieces of legislation making up the superannuation law, it is often put in the too hard pile.

So how much do you need?

Well this depends on your lifestyle costs and the type of lifestyle you want. 

First you need to work out how much you need for your spending. If you need $52,000 net per annum as a rule of thumb you will need about one million dollars in asset invested.

If you are going to get an income stream from a defined benefit superannuation scheme such as the CSS or PSS you need to deduct this from your overall living requirement.

Take the net (after tax) income amount and divide this by 0.052, this will give you the lump sum that you will need by retirement to fund your lifestyle. For example $52,000/0.052 = $1,000,000.

Once you have this amount you need to work out the number of years you have until you reach retirement and the rate of return you are getting on your investments in the fund.

This table can be used to work out how much you need to put away into superannuation each year to meet your retirement goals. This table can be used for other investment or savings goals too.

Years to Retirement 4% 6% 8% 10% 12%
5 5.63 5.98 6.30 6.72 7.12
10 12.49 13.97 15.65 17.53 19.65
15 20.82 24.67 29.32 34.95 41.75
20 30.97 38.99 49.42 63.00 80.70
25 43.31 58.16 78.95 108.18 149.33
30 58.33 83.80 122.35 180.18 270.29
35 76.60 118.12 186.10 298.13 483.46
40 98.83 164.05 27 9.78 486.85 859.14
This table was adapted from Barbara Smith & Dr Ed Koken’s “Superannuation in a nutshell”.

How to use this table:

If you have 20 years until retirement and you expect your investments to achieve a 6% annual return you would use the factor of 38.99. 

If you need $1,000,000 divide this by 38.99 to give you $25,647 being the amount you would need to put away each year to reach your $1,000,000 target.

There are a number of different tax strategies including salary sacrifice that you can use to achieve your outcomes so it is important to get the numbers done for your specific situation. 

Contact Money Mechanics today if you need assistance in calculating your retirement savings goals.