Planning your Superannuation

The logical way to plan your super is in two steps:

  1. Work out how much you will need in retirement.
  2. Work out how much you need to save to get that amount.

As with any long-term plans, there are many variables and plenty of scope for things not to work out as planned. The Office of the Retirement  Commissioner has produced material to help with these calculations. This information is free, so why not use it?

How much will you need in retirement?

There’s not always an easy answer to this one. There are many unknowns, about which you need to make educated guesses, such as:

  • The age at which you will stop working (many people can and wish to continue working beyond age 65).
  • The age you will live to.
  • The lifestyle you will want. It may be cheaper to live in retirement but you may want to continue some expensive habits.
  • Your health-care needs.
  • The amount of government assistance.
  • Investment rates of return while you are in retirement.
  • The rate of inflation between now and retirement.
  • The degree to which you will be comfortable spending your capital – if you spend everything there will be no inheritance for your children.
  • Whether you will use the equity in your house to live on.

If you can calculate how much you will want each month to live, there are financial tables to work out the amount of capital required to give that amount. There is plenty of scope for those calculations to be inaccurate, but it is still an exercise worth doing. As a benchmark, it is generally thought that most people need about 70 per cent of the income they require before retirement.

How much should you save?

Once you have calculated the capital sum you need to produce a reasonable income, it is relatively easy to work out how much you must save. There are two main variables:

1. The time you have before you are likely to retire

Remember this plan may change: some people decide to retire sooner; some have retirement forced on them by ill-health or redundancy; others decide to work longer.

2. The returns you have before you are likely to retire

This is harder to predict, but over time a good diversified portfolio should earn 5 per cent after tax and fees.

If you know these two things, and the capital sum you require, it’s relatively easy to calculate the amount you must save weekly. A financial planner can make this calculation or you can use the Retirement Commissioner’s website If you can’t afford to save the amount you have calculated, don’t despair. Save what you can within your budget and lifestyle. As time goes by you will probably be able to save more: your salary may rise, you may pay off the mortgage your partner/spouse may go back to work etc. Even a little saved now helps – it provides a base and will grow as the returns compound over the years.

Start early

Most people should pay off their mortgage before they start to save. However, as soon as you can, start saving and investing. Time makes all the difference:

The more time you have, the more you can tuck away. If you start at age 45, you have 240 months to make regular payments into a fund before reaching 65; if you start at age 35, you have 360 months.

The more you have, the better compound interest will work for you.

  • Age 45 years, saving $200 per month (6 per cent) at 65 years: $92,800
  • Age 35 years saving $200 per month (6 per cent) at 65 years: $201,900

The difference is obvious. Start saving as soon as you can!


Taken from: Financial Secrets, Martin Hawes, April 2002