Retirement costs are rising fast – thankfully so is super

Happy coincidences are rare enough in life that they should be celebrated when they arrive.

So, it is unquestionably great news that superannuation balances have recovered strongly at the same time as the cost of retirement has gone up as well.

Just to get the bad news out of the way first, the latest Association of Superannuation Funds of Australia (ASFA) figures show that its “comfortable retirement standard” has risen in cost by 1.1% in the March quarter to a record high of $70,482 a year for couples, and $50,004 a year for singles.

That rise takes the annual cost increase to live comfortably to 7.7%.

Drugs, medical and travel rising but gas the worst

The reasons for that rise are not hard to find with rapid rises in the cost of essential goods and services, namely food, fuel and electricity.

According to the ASFA research, during the March quarter, medical and hospital services costs rose 4.2%, the price of pharmaceutical products rose by 4.5% and insurance costs were up 3.5%.

Other jumps included a 2.4% rise in the cost of fruit and vegetables, a 4.7% rise in the cost of domestic travel and accommodation with some relief for international travel costs which rose 38.3% for the year but eased back in price by 8.2% in the March quarter.

The worst of all the jumps was for gas prices which leapt a record 26.2% for the year while electricity prices were up 15.5% for the year and have since kept rising.

Super assets close in on $3.5 trillion

In a very fortunate bit of serendipity, superannuation assets were heading up at the same time, pushing the total amount set aside for retirement to almost $3.5 trillion.

The superannuation returns are so strong that they will easily make up for losses last financial year.

Figures from Chant West showed that the median growth fund – which most Australians invest in – recorded returns of 1.2% in March, which brought total returns to a healthy 8.1% for the first 10 months of the financial year.

Debt ceiling resolution might bring improvement

Things have probably improved a little since then given the tentative relief rally that followed on from the resolution of the US debt ceiling crisis but even if the 8.1% return is maintained until the end of the financial year in June, it will more than “eat” last financial year’s 3.3% average loss.

Even an 8.1% annual return would boost the average superannuation balance of $147,425 to $159,366 over the financial year and would also be above the current 7% inflation rate.

That return would also be well above the typical long-term objective for the balanced/growth option of about 6% a year.

Improving super guarantee will boost super pool

Also helping to boost retirement savings is the legislated increase in the Super Guarantee to 11% from July 1, 2023 – a figure that will rise by 0.5% a year until it reaches 12% by 2025.

The improved Chant West numbers until March were helped by better performances for both shares and bonds, following on from last year in which both asset classes were weaker.

In March Australian shares were up 1.9%, international shares were up 1.6% hedged and 3.2% unhedged, local bonds returned 0.4% and international bonds rose 0.3%.

Good history of strong performance

Overall, superannuation has surprised on the upside since it was made compulsory in 1992, with the median growth fund rising by 7.9% a year compared to average annual inflation of 2.6%, producing a real (after inflation) return of 5.3%.

That has helped many super accounts to provide a much better standard of living in retirement than super fund members would have anticipated.

That is a key reason to make sure you are in a super fund that has low fees and has a strong investment performance, as we examined previously.

Total super funds are now likely to crest around $3.5 trillion this financial year after hitting an impressive $3.49 trillion by the end of March.

Contributions still outgrowing benefits

Interestingly, despite the rash of baby boomers retiring, contributions to super still outgrew withdrawals, growing 11.3% to $159 billion, while benefit payouts were just $95.8 billion.

Salary sacrifice and other extra contributions remain strong, with about 17% of wages and salaries going into super, well above the current mandated minimum of 10.5%.

Hopefully the performance of super funds will continue to be solid to cope with the increased amount needed to finance a comfortable retirement.