Do you really need a million dollars to retire well?

Million dollars retire pension APRA Australia wealth superannuation super
The combination of aged pension and a modest amount of superannuation can still maintain a good lifestyle.

Retirement is a scary thing for many Australians, with plenty of speculation about what you need to have stashed away to live well after working ceases.

A million bucks is the much thrown around figure by many people with some even saying that is much too little and others saying it is way too much.

That’s a very discouraging and futile argument for many, particularly if their super balance is way below this number and unlikely to approach it no matter what they do.

What is often ignored in these discussions is that Australia has a good and readily available aged pension system to help retirees survive.

Pension supplemented by super can be a great option

And while the pension on its own may not be overly appealing at about $25,155 a year for a single and $37,924 a year for a couple, the combination of the pension and even a modest amount of superannuation can still produce quite a good lifestyle.

Often the million bucks argument ignores this entirely, focussing on the amount you need to remain totally independent of government support, but in reality many older Australians will end up on some sort of hybrid retirement between super and the aged pension.

Other factors such as whether you own your house or pay rent and obviously how much you spend each year also come into play.

It is interesting to look at the actual numbers that have just been released by the Australian Prudential Regulation Authority (APRA) to see what is happening on the ground with retirement savings.

APRA numbers heavily skewed towards the wealthy

The first thing to note about these figures is that a smaller number of very wealthy people with massive superannuation balances have dramatically skewed the numbers, so averages are less than helpful to rely on.

Indeed, averages will leave the vast bulk of Australians convinced that they are way behind where they need to be when they are actually smack bang in the middle of where most people actually are.

The APRA numbers show that super savings now total $3.31 trillion, up 13% in the year to June 2021.

The “average” super account rose 17% to $135,000, but as I have explained that figure is much higher than if it was a median or “middle” number.

To further show the skewing of figures due to smaller numbers of very large super accounts, the $135,000 in super reported in APRA’s latest bulletin includes the average self-managed superannuation fund, which has a balance of $709,000.

With $822 billion in SMSFs, a whopping 24.8% of total superannuation savings, that really changes the figures.

A truly average super balance is closer to $92,000

So, if we exclude SMSFs from the calculations, the average APRA regulated fund over all age groups has a balance of just $92,000.

Drilling down further, people in their early 60s have average balances of $243,216 for men and $193,165 for women, clearly showing the gender gap that happens because women generally earn less and have more interrupted working careers.

This figure is arguably skewed a little in the opposite direction because a significant number of people who have small superannuation balances when they retire decide to cash those out for different reasons such as paying down housing loans and then they live off the money until the pension kicks in.

You can see this a little because the “average” person in the run-up to retirement had about $218,000 (averaged between sexes), while the “average” person starting an allocated pension had a balance of $321,914.

The amount has risen because a lot of smaller balances have disappeared entirely, being removed completely from the superannuation system.

Keeping even a small super balance can be a good idea

Many financial advisors think this “cash out” approach is a big mistake because even a very modest superannuation balance can top up the age pension for decades and improve living standards which is a better situation than a late splurge on retirement.

It all depends on individual circumstances, with paying off a home loan obviously a sounder decision than going on a world cruise but individuals are obviously free to make choices that suit them.

What you “need” is short of what you may “have”

What the averages show is that there is quite a gap between what the Association of Superannuation Funds of Australia (ASFA) claims is needed for retirement and what people actually have.

For single people, ASFA says the average person choosing to take an allocated pension on retirement has $321,914 in super savings and withdraws an average of $19,963 of their balance yearly.

That represents 5.9% of their balance, which is higher than the mandated minimum withdrawal.

ASFA calculated that a single person actually needs $545,000 to retire comfortably, withdrawing about $45,239 a year to support their lifestyle – also well above the mandate minimum.

It is worth noting that in both of these examples, the capital in the funs is probably being eroded over time, which again is something that is often seen as undesirable in discussions around the million buck minimum.

Combining super with the pension can be powerful

As I mentioned earlier, even modest super balances can provide a significant boost to retirement living standards when combined with the age pension – with the obvious caveat being that you need to survive between retirement (either voluntary of forced) and when the pension kicks in, which is currently 66 and slowly rising.

You have got to eat and live so obviously the picture is much starker for someone who is laid off at 55 with a small super balance compared to someone who retires voluntarily at 63.

Even so, the ASFA numbers show that if you can slip across the line with as little as $70,000 in super to supplement the age pension, you can still live a “modest” retirement lifestyle.

Another alternative which many choose is to draw down super at a faster rate in the early years of retirement when spending needs may be higher and then move to the hybrid combination of a smaller super balance to supplement the age pension.

So, it is a mixed picture overall – there is a staggering amount of money in superannuation but that total is skewed disproportionately to the top end.

Those with more modest super accounts should not despair though and get distracted by all of the discussions around million dollar plus super balances.

With some careful planning which integrates the age pension and allows for the asset and income tests, it is possible to have a very fulfilling retirement with a much more modest super balance than a million bucks.

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