Superannuation: Must-read tips and tools to help you plan your retirement

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Many Australians don’t know enough about superannuation and are heading towards an uncomfortable retirement if they don’t take action.

Working out how much superannuation you need to comfortably retire is crucial to avoid being caught short, but one thing is clear: those who drew down their nest egg during the pandemic will be significantly worse off if they don’t play catch up.

We’ve all heard alarming stories of Australians taking advantage of the Covid-19 early release program when they weren’t suffering the financial hardship it aimed to alleviate – renovating their home, buying furniture and the like.

Some took out the full $20,000 allowed in two tranches: once during the 2019–20 financial year, and again between 1 July and 31 December 2020 when the scheme ended.

According to SuperRatings, milking your superannuation account has a big flow-on impact in the future as you lose out on compound interest.

The Australian Securities and Investments Commission conducted research on this and estimated, based on its MoneySmart calculator assuming an income of $50,000 and a retirement age of 67:

*For a 30-year-old, taking $20,000 out of their super will have reduced their balance by about $43,000

*For a 40-year-old, taking $20,000 out of their super will have reduced their balance by about $35,000

*For a 50-year-old, taking $20,000 out of their super will have reduced their balance by more than $28,000

“We would encourage members to seek financial advice from their super fund or an adviser they trust to understand how accessing their superannuation early may have impacted their account and the steps they could take to help rebuild their nest egg,” SuperRatings market insights manager Camille Schmidt told NCA NewsWire.

Another impact of the pandemic on superannuation balances was people switching the type of risk-exposed fund they had, with some Australians spooked by falls in stock markets switching to a cash-based option.

“We found that a member who had a balance of $100,000 in January 2020 and switched to cash from balanced or growth at the end of March would now be around $25,000-$30,000 behind their position if they had not switched,” Ms Schmidt said.

“Furthermore, members who remained in a balanced option recovered their losses by November 2020. Similarly, members who stayed the course in a growth option saw their balance recover the losses by December 2020.

“This highlights the problems with trying to time the market.”

SuperRatings estimates the median balanced option fund grew by more than 140 per cent over the past 15 years, with a balance of $100,000 in September 2006 accumulating to $242,603.

Over the same period, growth fund members enjoyed an even stronger result, with the same starting balance growing to $247,549.

But share-focused options have delivered the highest returns over the past 15 years, with the median Australian shares option growing from $100,000 to $270,190 and the median international shares option surging from $100,000 to $261,803.

These types of options involve greater ups and downs over the years.

SuperRatings says the 2021 calendar year to date has been a period of robust growth for superannuation, with the median balanced option up 11.2 per cent – well in excess of funds’ objectives, SuperRatings executive director Kirby Rappell said.

“2021 has been a strong year for superannuation, with returns nearly three and a half times those of calendar year 2020 and almost double the yearly average for the past 20 years,” Mr Rappell said.

The performance of various funds varies wildly, however.

In August, the Australian Prudential Regulation Authority released the results of its inaugural super product performance test, finding 84 per cent passed.

But the following 13 products failed:

* AMG Super

* ASGARD

* Australian Catholic Superannuation and Retirement Fund

* AvSuper Fund

* BOC Gases Superannuation Fund

* Christian Super

* Colonial First State First Choice

* Commonwealth Bank Group Super

* Energy Industries Superannuation Scheme-Pool A

* Labour Union Co-Operative Retirement Fund

* Maritime Super

* Retirement Wrap

* The Victorian Independent Schools Superannuation Fund

So how do you know how much you need to retire?

Mr Rappell said a rule of thumb was to target a number then work back, taking into account aged pension and assets to get a complete picture.

Also, taking an income stream as opposed to cashing out a lump sum could be better, he said.

“Plan well and plan early has a huge impact, with far too many Australians still not knowing that their super fund offers an income stream/allocated pension (super account which you can draw down over time) that has compared very well relative to anything sitting in a bank,” Mr Rappell said.

According to the Association of Superannuation Funds of Australia’s retirement standard, for those wanting a “comfortable retirement”, members should aim for a balance of around $640,000 for couples and about $545,000 for singles.

Based on these balances at retirement and assuming you own your own home, an income of about $45,000 is generated for singles and $64,000 for couples each year.

The retirement standard also shows how much you need for a “modest” retirement.

ASFA has created a calculator that draws on average balance data for different age groups to provide an idea of what balance you should expect. You simply need to input your year of birth.

With current low interest rates meaning cash parked in a bank is appreciating little at the moment, it’s a good time to look into topping up your super.