A comfortable retirement: what and how achievable is it? (2024)

Our modelling has, for simplicity, focused on a single person reaching the $545,000 (in today's dollars) funding goal by age 67, which is the Government age pension eligibility age for those born on or after 1 January 1957.

A key feature of retirement funding for Australian employees is the compulsory superannuation contributions employers are required to make on behalf of certain employees - the Superannuation Guarantee (SG) system. As far back as 2007, the coverage of the SG system had reached 94 per cent of all employees,3a significant increase from the position in 1974 when only 32 per cent of employees had superannuation.4So today most employees have some level of superannuation contributions being made on their behalf.

The current SG rate is 9.5 per cent of an employee's Ordinary Time Earnings (OTE). Generally, OTE relates to ordinary hours (excluding overtime), and includes commissions, shift loadings and certain allowances. The 9.5 per cent rate will increase by 0.5 per cent per annum from 2021 to 2025, ultimately to 12 per cent.

The Average Weekly Ordinary Time Earnings (AWOTE) for the October 2017 quarter was $1,567.90,5or $81,755 per year. In our modelling, again for simplicity, we used $80,000 per year. Employees with this amount of income will have SG contributions of 9.5 per cent ($7,600 per year, paid quarterly) paid by their employer to a superannuation fund. These contributions are generally taxed at 15 per cent, so $6,460 is available to be invested by the superannuation fund each year.

Our modelling covers a range of income levels, from 50 per cent of the rounded AWOTE number ($40,000) to 150 per cent ($120,000). It also covers a range of ages, from 20 to 60, and a range of existing superannuation balances, from $nil to $200,000.

Table 1: future SG contributions accrual to age 67

Table 1 above shows that a 30 year old with earnings of $80,000 per year may accrue $536,000 in superannuation between now and retirement at age 67 from their future SG contributions alone, assuming no breaks in their employment. This amount is only slightly short of the comfortable retirement target of $545,000.

Table 2 shows the amount the same individual in Table 1 would need to contribute to superannuation on an after-tax basis (non-concessional contributions) to reach the funding target of $545,000, assuming they have nothing in super currently. The 30 year old individual considered above would need to contribute only $124 per annum

Table 2: After-tax super contributions per annum to reach retirement goal at age 67

These charts show that many Australians may be in a position to achieve a comfortable retirement, based on ASFA's definition and assumptions. The Australian Superannuation Guarantee system is a significant part of achieving this outcome, which relies on the currently legislated increases in the SG rate to 12 per cent.

Since its humble beginnings in 1992, when the SG rate was just 3 per cent and covered only 72 per cent of the workforce, the SG system has matured into a solid foundation for many Australians' retirement funding aspirations.

Depending on income levels over their working life, those entering the workforce today may achieve a comfortable retirement via their SG contributions alone. Those employees who weren't lucky enough to have SG at 9.5 per cent or higher throughout their working life nonetheless generally have a solid base upon which to further build via voluntary after-tax non-concessional contributions, salary sacrifice employer contributions, or (since 1 July 2017) personal deductible contributions up to $25,000 (including their SG contributions).

Appendix - Projection Rate Assumptions

The after-fees pre-tax projection rate of 6.7 per cent per annum used in this article is based on the asset class weightings, long term income and capital growth projection rates and other assumptions in the table below.

These rates aren't guaranteed, are provided as an illustration only, and may vary from actual results. The projection rates aren't intended to be and shouldn't be relied on when making a decision about a particular financial product. Before making any financial decisions you should seek personal financial advice from an Australian Financial Service licensee.