Will you have enough super when you retire?

THE sooner you plan how much super you’ll need upon retirement, the better. If you wait too long to establish a clear target and an accompanying plan to achieve it, you may be compromising your comfort in later years.

Making sure you have enough super upon retirement requires four calculations. First you have to outline your future domestic budget; then figure out the income you’ll need to maintain that lifestyle. Third is to find out how much super will be necessary to fund that income. Lastly, you must find out how much contribution your super needs over the coming years in order to reach this goal.

These are not easy calculations, as future expenses can be difficult to predict. Estimations about changes in inflation, the earning rate of your super and your life expectancy are tricky projections. They are, however, too important to be left to crossed fingers.

Calculating your future domestic budget

A good way to start estimating the cost of your retirement lifestyle is to analyse the budget you have before retiring. Naturally this consists of every expense in life from mortgages to movies. The following items are an incomplete guideline for assessing your current total.

• Household (mortgage, rent, utilities, repairs)
• Living (food, clothing, furnishings, hygiene)
• Health (doctor, dentist, medication, glasses)
• Personal (entertainment, shopping, restaurants, pets, holidays)
• Transportation (vehicles, petrol, maintenance, bus passes)
• Insurance (life, home, third party)

Once you draft a budget table you can update it as prices and circumstances change. The human factor to remember at this stage is to be realistic about what hobbies and habits you would like to stop spending on in the future, but probably won’t.

Deciding the income needed to provide for your retirement budget

After adding up the projected expenditures for your retirement years, you’ll need to adjust the total for inflation. This depends on the inflation rate and the date you expect to retire. The closer you are to retirement, the easier this number is to accurately calculate. Then again, it’s best not to do this kind of planning too late in the game.

You can adjust your calculations as the inflation rate changes year by year before your retirement date. This whole process, however, is hardly an exact science, so you may find it more practical to assume a fixed inflation rate for every year leading up to retirement, say 3.5% for example. It’s important to take these calculations seriously, but with all the variables and uncertainties of the future, absolute precision is not likely.

When you put your retirement budget figure through this process, you can provide yourself with a rough picture of what income you’ll need in the future. Generally speaking, the further away your retirement date is, the more inflated this figure will be compared to your current budget. MoneySmart is a website provided by the Australian Securities and Investments Commission with a retirement income planning page for getting your income forecast right.

Calculating how much super you’ll need

When you’ve got your required retirement income sized up, you’ve got to make sure there’ll be enough super to pay that magic number. This calculation is quite difficult and rough methods will not produce reliable results.

There are, however, some great calculators online for crunching these numbers. The government’s MoneySmart site is a good place to start. AMP Financial Services has online calculators for super and retirement simulations. AMP is an Australian company that provides financial planning, superannuation and retirement savings advice.

Is your super on track to meet your retirement needs?

You know how much income you’ll need for your retirement lifestyle and you know how much super is needed to pay that income, but are you on target to have that much super available when you stop working?

This is a point of stress for many people. Most super funds can provide calculation tools to find out if you’re on track; the hard part is catching up if you’re behind. This is usually a matter of finding out how much you can afford to put into savings.

If your domestic budget is gobbling up money that could be put into super, it may be in your best interest to reverse the situation sooner rather than later. You may need a financial advisor to find the most tax effective way of doing this. The sooner you begin this process, the better your chances of achieving your target super amount upon retirement.