Controversy over whether or not an average couple needs around $1 million in super to retire comfortably misses the point that for many this is an impossible target.
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If anything, the challenge of funding a comfortable retirement has become more difficult because of lower interest rates, volatile investment returns and the latest asset test changes.
Even for middle and higher income earners, the obstacles to funding a comfortable retirement are considerable, especially now that many retirees can expect to live into their late eighties. Remaining employed until the late sixties involves funding retirement for a minimum of 20 years.
Retiring earlier at age 60 requires sufficient capital to fund a 30 year or longer retirement. Assuming an investment return equal only to inflation, a capital sum of $1.2 million would provide a modest real income of $40,000 a year, only $6000 above the maximum age pension for a couple with modest assets.
In the past, higher investment returns together with partial access to the age pension helped many Australians fund a comfortable retirement with smaller amounts of capital.
With a 3 per cent real return above inflation a starting capital of around $940,000 would fund an annual real income of $40,000 for 30 years.
These calculations assume that during retirement, the capital is run down slowly at first but much more quickly at later ages. For sound reasons, people are reluctant to draw down their capital not least because of the uncertainty of how long they will live.
Current age pension rules providing access to a part age pension to people with considerable assets discourage retirees from drawing down their assets too quickly.
But after January 1, 2017, harsher asset test changes apply. A 7.8 per cent annual asset test taper rate will reward many retirees using up their capital with a larger part age pension entitlement.
Even if investment income remains totally tax-free as superannuation pensions currently are, reducing assets to qualify for additional age pension will provide a superior and more certain return.
Put simply, whereas retired couples had an incentive to build up their assets to in excess of $1 million, from 2017 onwards a lesser target of half that amount together with a part age pension will provide a higher income.
There is a clear message for people currently planning ahead for retirement. Superannuation savings in excess of around $500,000 will be far less beneficial than they currently are. Because of the asset test exemption, the first priority will continue to be to own the family home outright.
Then if larger super balances are available, they can be used to fund early retirement or higher levels of expenditure in the early part of retirement.
Daryl Dixon is the executive chairman of Dixon Advisory
