The retirement income sweet spot

Australia’s superannuation system may be confusing but an apolitical superannuation information group and a clever economist believe they’ve found the retirement income sweet spot.

According to Save Our Super and economist Sean Corbett, there’s a way to work the super system where you can save less, retire early and still have enough for a comfortable retirement.

It’s a formula based on balancing private retirement savings and assets with the Age Pension.

Learn the rules and you can play them to your advantage, Save Our Super Head Jack Hammond told The Australian: “The rules were set in a strategic framework of lengthening life expectancies, rising incomes and expectations of higher retirement living standards, so that people could save for themselves, with declining reliance on the Age Pension.”

Retirement income usually comes from one or two sources, or both: private investments (including property, superannuation, term deposits and accumulated savings) and the Age Pension.

Too much of the former leads to a reduction of the latter. This means that some retirees who have worked hard to build up savings and assets over their lifetime will receive very little or no Age Pension once they break the income and asset thresholds.

Save Our Super and Sean Corbett have calculated the optimal level of savings required to achieve a maximum level of benefit from both superannuation and the Age Pension.

They based the sums on a mix of Age Pension benefits and a five per cent annual drawdown of super, and worked out optimal benefits for both singles and couples.

The resulting formula busts the $1 million super myth by a long shot. According to the researchers, a single person with a home needs just $300,000 in super to receive a $33,958 annual income, while a renting single needs $550,000 for a $42,549 income.

YourLifeChoices’  most recent Retirement Affordability Index™ placed a single homeowner in the affluent tribe if he or she had an income of $42,078 and in the constrained tribe with an income of $23,426.

Homeowner couples need $400,000 for a $52,395 annual income, while renting couples need $650,000 for a $60,833 income.

The Retirement Affordability Index™ labelled homeowner couples as affluent if they had an income of $73,524 and constrained with an income of $42,240.

The team also found that owning too many assets may actually work against retirees. A couple who own their home and have $800,000 in super would receive an annual income of $41,251. Halve that super, and the couple receives 94 per cent of the Age Pension payments meaning that their income increases to $52,395.

The sweet spot would kick in at age 67, because that is when you can receive a tax-free account-based pension.

As far as being able to retire early, knowing you have $800,000 in super at age 60 means you could retire, spend $400,000 to fix up your home, travel and set yourself up for age 67, when you would have $400,000 left in savings and the ability to earn more Age Pension benefits.

It’s a handy formula for those who will never earn $1 million in super – the amount required to receive a $52,395 annual income without government assistance.

This “sweet spot” may be good in theory, but you should always consult a finance professional before making any decisions about money – especially retirement income.

Do you believe this could work? How do you feel about reducing your assets so you can receive more Age Pension benefits? Do you agree with the sentiment of this theory?

Related articles:
Five unexpected retirement expenses
Noose tightens on super funds
Not enough money for retirement

Written by Leon Della Bosca

Leon Della Bosca has worked in publishing and media in one form or another for around 25 years. He's a voracious reader, word spinner and art, writing, design, painting, drawing, travel and photography enthusiast. You'll often find him roaming through galleries or exploring the streets of his beloved Melbourne and surrounding suburbs, sketchpad or notebook in hand, smiling.
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