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What if I’m behind on saving for retirement? Editor's Note

Emma Rapaport  |  17 Dec 2021Text size  Decrease  Increase  |  
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New research shows most older Australians believe they lack the savings to comfortably see them through retirement. A 2021 survey, conducted by Challenger, found that only 40% of super fund members over 45 expect a “comfortable” lifestyle in retirement.

That's not to say Australians don't have enough saved for retirement. Whether they do was not the subject of the survey. But when asked how they feel about their savings, the majority expect only a “basic” lifestyle when their working life ends.

Report author and Challenger’s head of retirement income research Aaron Minney says fear of uncertainty and emotions drive a lot of how people think about their own retirement.

"If you look at people who are 65, even with the GFC, the last 20 years have been pretty good," he says. "They've saved a little bit and they've got a lot. But if you talk to someone at 45, they'll look at their savings and say well if I get really good returns, I'll be ok, but I don't know. They haven't already banked it and they've still got market risks ahead of them. What we find is it's the behavioural stuff, people's headspace, that has a big impact on how people feel about retirement."

How do we put ourselves in a positive mindset? As someone who tends to catastrophise, I don't think I'll ever allay all my fears about saving for retirement. What if the property market crashes? What if stocks fall 50% when I’m in my 60s and take a decade to recover? Retirement standards and benchmarks put out by super funds are useful but anxiety inducing, especially when they point out how far behind you are. Some argue that the estimates are too high (but that’s a discussion for another time). Minney says the best thing is to have a plan, whether that be a formal financial plan (documented via a spreadsheet) or simply a mental plan. A set of goals and a plan of how to reach them.

Plans and concerns about outliving savings

Plans and concerns about outliving savings

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Source: Challenger, Balancing Retirement Income Risks, November 2021

Back in September, I wrote about how to reach $1 million in retirement. The conclusion was to start early, save often and let compounding do most of the heavy lifting. For example, someone who consistently saved 10% of their $55,000 starting salary from age 22 would have around $200,000 at 40, assuming 2.5% annual wage growth and historical market returns. That rises to around $550,000 at 50 and $1 million at 60 (before accounting for inflation). Money makes money makes money. But what if you started saving for retirement in your 40s or 50s? What if you took time off work to travel? Is it possible to design a plan to make up for lost time in the market?

I won't lie—starting later is harder, but there's a path forward, no matter when you start saving. Even investors who don’t start seriously saving for retirement until age 40 can still make decent progress toward shoring up retirement assets if they're willing to make sacrifices.

Let's look at what it takes to catch up using two scenarios – 1. taking time away from work and 2. starting to save for retirement in your 40s.

Two plans

I used the same calculations from my previous article but adjusted the starting age or built-in a savings gap. Remember, my calculator makes lots of assumptions – namely that there is a long-term inflation rate of 2.2%, and that wages are rising at 2.5% annually. Neither work this smoothly in real life but are annualised for simplicity's sake and illustrative purposes. Both scenarios assume annual returns in line with long-term historical averages (after fees and taxes, annualised), becoming more conservative as investors close in on retirement age.

Each of the scenarios below assumes investors can consistently save extra money on top of the superannuation guarantee. That may not be feasible for everyone and some investors might lack the income security or other resources to consistently save for decades. Others may have intermittent work and income. As a general guideline, the examples below illustrate the benefits of starting early and suggest some other steps individuals can take if they're running behind. No matter your income level, the point remains: starting late isn’t the end of the world. Regularly setting aside extra money into super can help you reach your goals.

Taking time away from work

Lives don't follow neat projections, and it is common for people to take time away from work. However, the impact of halting savings early on can be massive. Time is a very important factor in investing – the longer you have to compound, the better off you'll be.

The good news is that it’s possible to catch up if you make additional savings into super above and beyond the superannuation guarantee. You can contribute up to $27,500 each financial year into super, taxed at a concessional rate of 15%. Tax on income and capital gains is also favourable.

Let's run a scenario:

Alex starts her first job at age 22 with an annual salary of $55,000. Her employer contributes 10% of her pre-tax salary into a MySuper fund. At age 30, she takes 5 years off work. During this time, she makes no contributions to super. If Alex returns to work at age 35 and relies on the mandatory SG system, she'll retire at age 67 with around $550k in super (adjusted for inflation) – a respectable amount but well off where she'd be if she hadn't taken time off. However, if she sacrificed an additional 5% of her pre-tax salary into super, she could add around $200k to her final balance.

You can view my assumptions here

For more information about salary sacrificing, check out the MoneySmart and the ATO websites, and have a chat with your employer.  

Starting at 40

Things start to get a bit more difficult here. A person who begins saving for retirement at age 40 will struggle to fully catch up, even after carving out the compulsory 10% - 12% of each year's salary for retirement over the next 27 years. The main way investors can catch up is by aggressively boosting their retirement savings with extra contributions to super. Saving using non-concessional contributions, or saving outside super, is another option, as is delaying retirement for a few years, adjusting lifestyle expectations, or working part-time during retirement.

Let's run another scenario:

Sam is 40 years old and has an annual salary of $90,000. At this relatively late stage, he has no savings in super, and feels regret for not starting sooner. If he starts saving now, relying solely on the superannuation guarantee, at age 67 he can build-up almost $300k in super (adjusted for inflation). But this is well off his retirement goal. If Sam scrimps and puts away an additional 10% of his pre-tax salary into superannuation, he could add around $500k to his final balance – getting him to about the same place as if he'd started saving in his 20s. This is an enormous effort and Sam should be thrilled with his efforts.

You can view my assumptions here.

Note -- there are limits to how much extra you can add to super each year non-concessionally. From 1 July 2021, the concessional contributions cap is $27,500 (indexed in line with average weekly ordinary time earnings). Your cap may be higher if you did not use the full amount of your cap in earlier years. This is called the carry-forward of unused concessional contributions.

What it all means

Saving for retirement can be daunting, and feelings of guilt over not getting started earlier can make it even more dispiriting. But it’s important to keep in mind that no matter how late you start, there’s almost always something you can do to improve your prospects for retirement. Start where you are, use what you have, and do what you can. Even small steps in the right direction can help improve the outcome.

Other tips to boost your super:


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is the editorial manager for Morningstar Australia. Connect with Emma on Twitter @rap_reports. You can email Morningstar's editorial team editorialAU[at]morningstar[dot]com

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