There’s no one-size-fits-all retirement income

An adequate retirement income is – like beauty – all in the eyes of the beholder. The Australian superannuation system has for the past 20 years been concentrated more on the value of the account balance at the time of retirement – the ‘how much is enough’ question.

That debate is now shifting quite noticeably into the realm of what is the level of retirement income required.

Neither question comes with a definitive answer.

But we should expect the definition of “adequate” to become one of the most heavily debated concepts in superannuation in the year ahead.

The Federal Treasurer, Scott Morrision, has already kicked things off from the government’s perspective with his speech to the recent Association of Superannuation Funds of Australia (ASFA) conference in Brisbane.

He outlined the high-level framework of how the federal government is thinking about super – particularly the cost of tax concessions that super savings enjoy.

He said that “as a government we want to be very sure that superannuation tax concessions are appropriately targeted so that they can secure an adequate retirement income for Australians”.

So, what does Mr Morrison define as “adequate”?

He understands this is a long way from being an exact science but suggested one approach is to use income replacement rates – where retirement income is given as a percentage of pre-retirement earnings.

The Melbourne Mercer global Pension Index, for example, suggests a replacement rate of 70 per cent is a suitable level that someone on a median income should aim for.

Such measures are useful as a starting point but clearly a range of personal circumstances are major drivers of what is an adequate level of retirement income for you.

ASFA publishes indicative retirement income rates on its website for what it terms a “modest” retirement and a “comfortable” retirement level.

It estimates that an income of $34,200 will give a couple a “modest” retirement lifestyle, while those looking for a “comfortable” although by no means lavish lifestyle will need around $58,000 a year.

The debate over what is “adequate” is important because Mr Morrison has clearly signaled that the objective of the super system should not be for it to be used as an “open-ended savings vehicle for wealthy Australians to accumulate large balances in a tax-preferred environment”.

The government has committed to adopting a key recommendation of the Financial System Inquiry which will enshrine the objective of the super system into legislation. We should expect the delivery of retirement income to feature strongly in the super system’s objectives.

It will be a critical reference point as the various policy positions are debated through next year ahead of the next federal election.

For younger members of super funds the debate may well seem academic. For those people within a few years of retiring – along with those already retired – it will be of critical concern.

While the public policy debate will frame the broad issues of equity and sustainability for the system the challenge for individual fund members is to understand what their retirement adequacy level looks like.

That is where specialist advice that factors in your unique personal circumstances, potentially in combination with the age pension, can build out a retirement income plan will take an abstract, high-level policy debate and deliver it in a real-world way to your front door.

Then you can be the judge of whether “adequate” is a thing of beauty or an ugly set of numbers.

Written by Robin Bowerman, Principal, Market Strategy and Communications at Vanguard Australia.

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