The COVID-19 pandemic has significantly impacted the superannuation savings of most Australians.
Firstly, the economic downturn resulted in investment markets heading south. Asset values have fallen, so superannuation balances have fallen, impacting both people saving for retirement and current retirees.
The second trigger is the ability for Australians to withdraw up to $10,000 of their superannuation in the 2019-20 financial year, and a further $10,000 between 1 July and 31 December 2020, upon meeting certain requirements.
While investment markets go through cycles that are as predictable as day following night, intentionally withdrawing money from superannuation early can have a more damaging effect.
Whether allowing people early access to their superannuation to help them weather financial hardship brought about by COVID-19 was right or not, is a question that gets emotions running high.
There is one school of thought – generally driven by the industry superannuation funds, and even former Prime Minister Paul Keating – that argues allowing people early access to their super is a bad thing. Their case is argued on the basis that withdrawing money from super means that less will be available for retirement when that eventually arrives.
The other side of the debate is driven by groups like the thinktank, the Grattan Institute, that argues the early release of superannuation should not really have any significant bearing on the superannuation savings when retirement comes around.
Whichever side is right, only time will tell.
There is, however, a bigger question to be considered. Perhaps it is the elephant in the room.
And that question is, “How much is enough?”
Does a person need a million dollars in super to be able to retire, or is the superannuation “sweet spot” somewhere closer to $300,000? What is the right answer?
Ultimately, how much a person needs for their retirement will depend on:
- How much income they need for their preferred retirement lifestyle.
- If they want a lump sum to replace their car, renovate their home, or undertake extended travel.
- If they qualify for income support from the government such as the age, or a service pension.
- Whether they are single or a member of a couple.
- Their state of health.
- How long the income will be needed for – a polite way of estimating life expectancy.
- Whether they plan to leave funds in their will, or run their money down during their retirement.
- If they take on some form of paid work in retirement.
- If they are likely to receive an inheritance.
- If there are other assets – e.g. a holiday home, investment property or a business.
By considering these factors, a retirement income profile can be constructed.
Importantly, once the preferred level of income is known, and some assumptions made around how long it is to likely to be paid for, it is possible to start to put together a plan that will test the likelihood of the preferred level of income being achieved.
Designing a retirement income plan is not something that should be left to the eve of retirement. Starting work on a retirement income plan some years before actual retirement will provide a much greater chance of success.
A financial planner is a great resource to be used to help you get your retirement plans into order. Planning will not guarantee success, but it will help to minimise the risk of failing to have the retirement you have always dreamed of.
1. Australian Financial Review, “Early Release of Super’s Retirement Hit Exaggerated”, 7 August 2020