Management
Nov/Dec 2002

Where will your 9% get you in retirement?
By Geoff Coy, Certified Practising Accountant

In this article, Accountant Geoff Coy looks at whether your current superannuation will meet your retirement needs.

Just as important, will your superannuation work for you in retirement?

Case studies have shown that many Australians will experience a significant drop in living standards if they rely solely on compulsory employer superannuation contributions.

Most people tend to think they will enjoy the same lifestyle in retirement as they did before. They will want to be able to do things like go out to a restaurant, take a holiday, buy a new car and spoil their grandchildren.

An Aging Population
The population in Australia is rapidly aging, and this has long-term implications for all Australians. The number of people aged over 65 is expected to grow from 2.3 million in 1999 to 4.2 million in 2021 and 6.5 million in 2051, representing 25% of the entire Australian population in 2051.

For middle-income earners retiring at age 60, the current superannuation system will provide a modest but adequate standard of living, but for anyone retiring at 55, it provides a standard of living slightly higher than that provided by the age pension.

Those who retire early will be even worse off because they have less scope to save for retirement and will have to provide for a longer period of retirement.

Many employees and small business operators in today's commercial environment and in particular the service station industry, do not get to choose the timing of their retirement and are forced to draw on their superannuation to survive. It should be at a sufficient level by the age of 55 to 60 years to enable you to do so and to maintain a respectable standard of living.

Take the case of Con who at 45 years of age is married with two children and currently drawing a salary of $50,000 a year from his convenience store business. In recent years Con has not concentrated on his superannuation investment with contributions being limited to the guarantee level which now stand at 9%.

Con's and his wife's current combined superannuation balance stands at $200,000, the bulk of which came from a roll over fund from previous employment, which was in existence prior to him going into business.

If Con wants to retire at the age of 60 and assuming he requires a gross income in retirement in today's dollars at a current earnings rate of 6.25% his targeted retirement benefit will need to be $756,440.

Unfortunately for Con if he continues with his current level of employer contributions i.e. 9% at a projected earnings rate of 6.25% his estimated targeted benefit will only amount to $391,000. A shortfall of $365,440.

Contributions need a Lift
For Con to reach his targeted retirement benefit by age 60 he will need to lift his employer contributions from the current level of $4,500 per annum to $27,300.

As highlighted by Con's situation we will need to increase our retirement savings, if we want to have a higher standard of living when we retire.

To do so, our awareness about superannuation and the need to save for retirement will need to increase. We need to ensure that we have the policies and systems in place that will serve us well into the future. This requires finding ways to encourage greater savings for retirement.

Saving for retirement is now a lifelong objective. It's not just those close to retirement who need to think about it.

These thoughts are reinforced by legislation which has just been passed implementing the government's pre-election plans to allow superannuation contributions to be made in respect of children.

This is so that savings for retirement can begin at the earliest opportunity. It may seem unusual to have superannuation savings started at such a young age, but over the next few decades we will need to focus more and more on supporting our own retirement.

Compulsory superannuation alone will not give us the level of savings we need to keep the same standard of living we experienced prior to retirement.

Increasing voluntary contributions will go a long way to supporting the other two pillars of retirement - compulsory super and the safety net of the age pension.

Doug & Sue Heath Leave Shell Sundeck

Long standing clients of Geoff Coy, Doug and Sue Heath have left Shell Sundeck after 32 years of continuously operating their one and only service station business. Their franchise has expired and Shell will make the site a multi-franchise operation.

Shell Sundeck is uniquely positioned at Mobbs Hill, Carlingford with sweeping views west towards the Blue Mountains. It has been home to Doug and Sue since they commenced operating the site back in 1970, well before the days of credit cards, computers, price support and when the daily control book controlled the business.

In earlier years Doug was always known for his no nonsense uncompromising manner and it was not unusual to see a young accountant or area representative leave Doug's site with his or her tail between their legs.

Sue has been a tower of strength to Doug over the years with many thousands of hours spent in the back office and console.

Doug and Sue will take a long earned break from business. This will no doubt include an extended holiday and more time with their family.

Geoff Coy and C-store wish them the very best for the future.