When it comes to retirement, a key question is how much you’ll need. Fortunately, Ross Clare designed the ASFA Retirement Standard to answer that, setting out the lump sums required and the estimated annual and weekly costs of modest and comfortable lifestyles for singles and couples. While the cost benchmarks are updated quarterly, lump sums have risen for the first time in three years. In this Q&A, Ross explains what’s changed, how the Age Pension fits in, and what it means for the retirement outlook.
Q1. What are the new/updated lump sum amounts needed to fund a comfortable and modest retirement for both couples and singles?
The new lump sums are: Comfortable single up from $595,000 to $630,000; comfortable couple from $690,000 to $730,000; modest single from $100,000 to $110,000, and modest couple from $100,000 to $120,000. These figures assume home ownership.
Lump sums required for modest retirement when renting privately were first calculated quite recently so we have not changed them at this time.
Q2: Why have lump sum amounts increased now?
There have been a number of factors in play. It is now some three years since the lump sums were last adjusted. Living costs in retirement have increased substantially. The Age Pension has increased in line with the percentage increase in living costs for retirees but that covers only part of expenditure in retirement. Also, deeming rates for investment returns subject to the Age Pension means test have increased, reducing the Age Pension payable to a substantial number of retirees.
Q3: What are deeming rates?
Deeming forms part of the means test for the Age Pension. It is used to determine the amount of income included in the income test part of the means test. It is called deeming as you are deemed to earn a certain annual rate of return on your financial assets, regardless of the actual returns. Instead of assessing your real investment income, a standard rate is deemed to apply to assets like saving, shares and managed funds. This system is a way to help simplify the assessment process and ensure consistency across applicants. Also, in many cases the deemed amount is lower than average investment market returns. The Government has made two upwards adjustments to the deeming rates in the last year.
Q4. Why are the weekly/annual expenses estimated for a modest and comfortable retirement adjusted quarterly, while the lump sum amounts for retirement remained unchanged for the past three years?
If the Age Pension increases in real terms, as it is expected to do so over the long term, then the Age Pension increases make a major contribution to covering the increased costs of retirement. The Age Pension is adjusted by the greater of the increase in real wages or the CPI. We also build a little leeway into the lump sum amounts. Investment returns have also been strong in recent years.
Q5. How do the lump sum estimates prepared by ASFA consider the receipt of the Age Pension?
Like the online calculators on many fund websites, ASFA makes use of a spreadsheet which takes into account receipt of the Age Pension over the course of retirement. In essence the calculation is one that involves goal setting for retirement savings at age 67 which will support either a modest or comfortable lifestyle in retirement.
We assume that superannuation savings are completely exhausted at age 92. Each year an increasing amount of Age Pension is received due to the interaction of the Age Pension means test and the increasingly smaller superannuation balance.
The estimate also takes into account the Age Pension increasing relative to inflation in the medium to long term given that the Age Pension maximum amount is linked to growth in real wages.
Q6. How does the Age Pension work in with super as people continue to draw down their super in retirement?
Most retirees will rely on at least a part Age Pension at some stage in their retirement. The Age Pension provides a base for retirement income and it also provides financial protection from the impact of longevity. If an individual suffers financial losses this in part is compensated by a higher Age Pension payment. The means test for the Age Pension means that superannuation and the Age Pension mesh together.
The Age Pension provides a floor for retirement income, but at a basic level. Superannuation allows individuals to achieve a comfortable standard of living in retirement, supplementing or replacing support provided by the Age Pension.
Q7: Do you expect the lump sums to change more frequently (than every three years) or are these set for a while now? And if so, what would make them change more often?
Most likely the next review will be in three years’ time. However, if inflation is high over the next couple of years and/or changes are made to the policy settings for the Age Pension it may be necessary to revisit the lump sum amounts sooner than in 2029.
Q8: Despite the raise is lump sums now needed for retirement, what is the outlook for retirees generally?
The outlook is good. Compulsory superannuation has now reached 12 per cent, the Low Income Superannuation Tax Offset is being extended, superannuation now applies to paid parental leave, and investment returns have been strong over the last couple of years. Around half of recent retirees are able to achieve a standard of living in retirement at ASFA Comfortable or above and this percentage will continue to increase as more people retire with lengthy paid work periods where the SG was at more than 9 per cent of wages.
However, it remains important for individuals (and couples) to check whether they are on track to achieve the standard of living in retirement they want and deserve. Voluntary superannuation contributions can attract valuable tax concessions for individuals and they play a crucial role in boosting retirement savings and living standards in retirement.
For further information, visit the ASFA Retirement Standard including the Super Detective calculator where you can enter your ages to see if your super balance is on track.
