That Age-old Issue
Sydney Morning Herald
Saturday September 19, 1998
Don't be retiring when working out your super.
HOW much do you think you need to save in superannuation in order to retire in style? It was while searching the Net for an answer to this that I stumbled across an amazing statistic. If my partner and I were to eat three meals a day for 20 years at a lowly cost of $5 per meal, this alone would amount to $219,000.
Disconcerted by this information, and wishing to avoid a forced rediscovery of my Scottish roots in my old age (far too much porridge and potatoes), I decided it was time to consider the whole issue in a bit more detail.
TIME TRAVEL
If you've not thought about superannuation much before now, then an easy first step is one of the simple retirement calculators found on the Net. You can find one of these calculators at www.industryfunds.org.au, a site that pools information from several leading Australian funds. All you have to do is click on any of these fund names and then the icon labelled "Calculate your super".
This calculator takes a couple of minutes to download but, when it does, you'll see a row of empty boxes with headings. Your job is to fill these in with your age now, your age when retiring, your salary, how much super you've put away so far and your weekly contributions.
If you're self-employed, then you probably won't contribute super at the standard rate that pops up automatically with this calculator. You can get around this, however, by setting your Annual Salary to zero and then entering the amount of super you actually pay into the box labelled Weekly Contribution.
With this information complete, you'll see a graph similar to the one shown here, telling you your projected Fund Value by the time you retire. And, in case you were wondering, it'll even tell you how much more you'd be worth if you contribute an extra $10 a week.
ASSUME AS LITTLE AS POSSIBLE
Although this graph provides a quick insight into how much you need to save, be aware that any superannuation projections come complete with several assumptions. For example, the graph in our example assumes inflation to be 5 per cent a year, earnings to be 9 per cent a year and it makes no adjustments for tax.
True, no superannuation projection is valid without considering inflation or investment earnings but, in this global climate, it's probably more helpful to stare into a crystal ball than to make assumptions about the economy. Be aware of this with superannuation forecasts and ask yourself whether you think the assumptions they are based on are reasonable.
Add to this the fact that the combination of statistics and people is always an uncomfortable one. For example, one of the other assumptions this particular graph makes is that your salary will increase in line with inflation and that your superannuation contributions will always be a constant percentage of your salary.
It may be that this doesn't fit with the way you intend to live. Certainly, the droughts and floods of small business mean that a constant income stream is anything but likely. Even for people in regular jobs, different life phases usually mean very different levels of savings.
TIME TO PLAY
A good exercise at this point is to play with your superannuation model and try out several scenarios. Although you'll still be guessing about the future, at least this way you'll get a feeling for how the whole game works. You can see the effect that taking a few years off or making a big, lump-sum payment early in life will have on your final super payout.
Try splitting your future working life into several periods of five or 10 years (depending on how old you are now). For example, if you're 35, do three projections: the first up to the age of 45, the second up to age 55 and the last up to retirement. Decide what percentage of your salary you might reasonably contribute for each of these periods in your life.
Now trick the calculator into accepting different contribution rates for each of these periods. Let's say you plan to contribute $80 a week until you hit 45. Enter your details as normal but put 45 as your Retirement Age. See what your projected Fund Value will be and note this value.
Now run the calculator again, but this time pretend you're 46. As your Starting Fund Value, enter the value you just calculated as your closing Fund Value at age 45. Enter 55 as your Retirement Age and, say, $120 a week as your contribution. Make a note of your projected Fund Value once more. Continue this process up to age 60 or 65, building each result upon the previous one.
Perhaps one of the most interesting things about doing superannuation projections is the way it becomes apparent how unpredictable the whole affair is. Even looking at the simplest of scenarios, it's easy to see how the final result can be hugely affected by very small changes in your contributions or in the economy.
TWIST IN THE TALE
Taxation is a complexity that you simply can't ignore. Next fortnight, I'll look at a simple spreadsheet template to help you consider taxation, reasonable benefit limits (RBL) and salary packaging as part of the big picture of planning your retirement.
veechi@pnc.com.au
Rich pickings
IF you've got Quicken on your PC in the office or at home, then the Retirement Planner feature provides an alternative to the calculator freebie described above. (Quicken is a popular personal finance software package, particularly suited to managing investments and tracking money.)
Open up Quicken, hit the Planning icon and select Use Financial Planning Calculators. Choose the Retirement Planner and hit OK.
You'll have to answer several questions such as your age, your contributions, when you want to retire and so on, then you'll have to state your own estimates for inflation and the yield on your investments.
You can choose whether to inflate your contributions in line with inflation, and whether you wish to express future annual income in terms of today's money.
When you're ready, click Calculate and, to see a breakdown of how Quicken arrives at this calculation, click Schedule. Whatever result you get, try adjusting the figures for the inflation rate and estimated yields in order to see what the effects of changing these variables will have on your final retirement income.
For more information on Quicken, check out the Intuit site (www.intuit.com.au).
© 1998 Sydney Morning Herald