A reader from “Ten Bags Full” of “C’mon you old codgers! Its time to get back to work!” http://tenbagsfull.com.au/tweet/show/11088
suggested the Rule of Twenty” as a guide to how much a retiree might need in super savings for retirement. This rule deserves to be more widely known, and is therefore re-published.
The Mr-Market Rule of 20 tells you how much you need for retirement. While academic for anybody under 50, it’s quite compelling for those nearing retirement.
Take how much you think you’ll need to live on (about 70 per cent of your final salary is one accepted benchmark, or you could use $58,000 a year as suggested by the Association of Superannuation Funds) and multiply it by 20.
So for $58,000 a year, you’d need $1.2 million. That’ll last 33 years, by the way, as capital remains invested during this draw-down phase. This covers things such as your age, inflation and even taking out 4.5 per cent a year automatically, though it applies to essential expenses only.
For the benefit of readers who are unfamiliar with the provisions of the Australian government for retirees, this summary is included:
Retirees are able to earn up to $28,974 each tax-free. The age for pension entitlement is now 65, but legislation has already been passed for the pension age to be extended to 67 by the year 2023. A recommendation by Australia’s Productivity Commission is for a further lift to 70 to be implemented by 2035.
The single person full age pension annual income is $21,913. The full annual pension income for a couple is around $33,036. Furthermore the pension comes with valuable concessions for many expenses.
This is a generous safety net, but not sufficiently generous to meet the income needs of everyone. To this end the government also provides tax incentives to those who are willing to save for their retirement, and be less reliant on government subsidies.
The lump sum saved during the years of employment is commonly rolled over into providing an “allocated pension” income stream. The retiree controls the investments if the assets are held within a properly registered self-managed super fund. Investment earnings in a super fund are tax-free in the pension phase.
Present contribution limits enable superannuants at retirement to draw-down a super pension perhaps double that of the full age-pension. As the super balance declines, the government pension provides safety-net support to cushion the reduction in super payments.
An example from personal experience illustrates the benefits of superannuation above the pension for a couple:
Lump sum at retirement Dec 2000 was $500,000 increased to $710,000 two years later after adding the proceeds from the sale of his office.
Yearly draw-down as a pension was $60,000. In addition there were yearly one-off draw-downs for large ticket items to a limit of $20,000. Over a 13 year period the total pension draw-down was about $780,000, plus special draw-downs. Residual capital at closure of the fund was $200,000.
Despite the impact of the GFC, the super fund will have supported their standard of living with over $1 million in benefits, with interest and capital returns likely to continue until their demise.