THE SWEET SPOT WHY YOU ONLY NEED $253k IN SUPER TO RETIRE
There is a winning number that pre-retirees and retirees need to know. We call it “the sweet spot” – the point where superannuation combines with the full age pension.
The sweet spot has been harder to hit since the federal government tightened the assets test taper rate in January 2017.
Combining the age pension with super is harder for homeowning couples with super, plus other assets, above $401,500, which is the cut-off point for the full pension. With this amount in assets, their pension shrinks until it cuts out at $880,500. But the catch is this: their income from super isn’t high enough to compensate for the loss of the pension.
They’re not necessarily wealthy. Many middle-income earners, who have been diligently building up their savings through their working lives, are shocked to find out that their super is a drag on their retirement income because of the assets means test.
In fact, people with less in super who qualify for a full age pension can do better.
For example, a homeowning couple with super of more than $401,50 will be worse off in terms of income tha a couple with $386,500 who qualify for the full age pension of $37,341. The couple with the higher balance lose $3 a fortnight in the age pension for every $1000 above the assets threshold. That is $78 a year or 7.8% of their incremental assets. In the current interest-rate environment, their savings can’t earn nearly enough to offset that penalty.
A single homeowner with $253,000 in super, plus a few other assets, qualifies for a full age pension of about $24,700 a year. Under the assets test, the cut-off for a part pension is $585,750. So if a single person has saved, for example, $750,000 in super, they miss out on the age pension and have to live off the income generated by their savings.
In the analysis for our cover story, we assume our case studies have only a modest $15,000 in other assets, such as a car. The numbers would be different in other situations. Also, there are different assets thresholds for non-homeowners. For non-homeowners, the sweet spot would be $467,500 for singles and for a couple it would be $601,000.
Inc ngly middle-income earners are caught in what Andrew Boal, chief executive at Rice Warner and chair of the Actuaries Institute’s retirement strategy group, describes as the taper trap.
“With the taper rate at $78, the retirees [a couple] could be as much as $40,000 [income] worse off. In other words, the more they save, the worse off they are,” says Boal.
The sweet spot has come into sharp focus in the past year, especially because of low investment returns. In fact, some pre-retirees have decided it is better to spend some of their super and to rely on the certainty of the age pension instead.
CASE STUDIES: How it works
