The retirement sweet spot: When less in super can be more

It might seem like a no-brainer that the more we have in super, the higher our income in retirement will be. But that’s not always the case. New research sheds light on the super sweet spot that can help you maximise your retirement income.

For years we’ve been encouraged to grow our super. However, tucking as much as possible into super may not deliver the optimum income in retirement. It could even see your income fall.

That’s the finding of new analysis by exchange traded fund (ETF) provider, BetaShares Australia, which confirms that less can be more when it comes to earning a decent income in retirement.

According to BetaShares, unless you accumulate over half a million dollars in super, you could face what they describe as the “retirement trap” – a conundrum that can see increased super savings lead to a lower retirement income.

What is the “retirement trap”?

To see how this trap works, let’s take a look at some background details.

Most Aussie retirees rely on the three main “pillars” of retirement income – their super, investments held outside of super, and the age pension.

While Australians have collectively amassed close to $3 trillion in super savings, many retirees have not benefited from employer-paid super throughout their working life. Even today, broken work patterns and low incomes can lead to low lifetime super savings. As it stands, ABS statistics show that only one in five (21%) of today’s retirees are fully self-funded. The majority rely on a full age pension payment (52%) or a part pension (27%).

It’s no secret that the age pension is hardly a king’s ransom. So on the face of it, tucking more in super (assuming you can afford this) would seem a sensible way to boost income in your senior years. The risk is that your super may not earn a return that compensates for the loss of the age pension.

More in super may mean less age pension

Super is included in both the income and assets tests that determine eligibility for the age pension. As BetaShares points out, there is an income range between $174 and $2,026 per fortnight, where every additional dollar earned sees the pension reduced by 50 cents. This effectively halves the value of additional earnings from super for retirees in this range.

On the assets side, an individual homeowner with assets above $263,250, can see their pension reduced by $3 each fortnight (or $78 annually) for every additional $1,000 in assets. To offset this reduction, each $1,000 invested in super would need to generate an annual return above 7.8%.

And that’s where the crunch comes: 7.8% is a strong return.

Sure, over the past 12 months to February 3, Australian shares have recorded gains of 18.09%. But as a retiree, chances are your super will be invested for much longer than just one year. Over the past decade, Aussie shares have notched up annual returns averaging 4.07% ­­– well below the 7.8% that BetaShares say super needs to earn to make up for lost pension payments.

Dr Roger Cohen, senior investment specialist at BetaShares, sums up this situation saying, “Common wisdom tells us that accumulating more savings through our working lives should result in higher income in our retirement years. However, our analysis shows that, for certain people, under the current system, accumulating more money can actually produce the reverse.”


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What is the retirement sweet spot?

BetaShares crunched the numbers and found that Australians at “retirement age” (assumed to be 67, the age at which Australians are eligible for the aged pension in 2023), could face the retirement trap if they have savings between about $350,000 and $600,000 – depending on how their money is invested. It’s only when you have super worth well over half a million dollars that increased savings lead to increased income.

This backs up the latest Retirement Standard from the Association of Superannuation Funds Australia (ASAFA) that shows a couple needs $640,000 in super to live a comfortable lifestyle. The figure for singles is $545,000.

What to do if you’re caught in the trap

For retirees caught in the retirement trap, Dr Cohen said, “Additional assets are better off spent, or, if they are invested, must generate returns that are well in excess of 7.8% per annum to exceed the pension entitlements that are lost. Unfortunately, such investments generally entail taking risk above levels which are commonly recommended for retirees.”

As it stands, not too many retirees may be impacted by this problem. Figures from the Association of Superannuation Funds of Australia (ASFA) show that among men aged 44-64, the median super balance is $183,000. For women the median is even lower at $118,600.

What the BetaShares analysis does reinforce, is the value of seeking professional financial advice about super in the pre-retirement years before you hang up your work boots for good. After years of growing your super savings, the last thing you need is to find that your nest egg pushes your income down.

Nicola FieldAbout Nicola Field

Nicola Field is a personal finance writer with nearly two decades of industry experience. A former chartered accountant with a Master of Education degree, Nicola has contributed to several popular magazines including the Australian Women’s Weekly, Money and Real Living. She has authored several best-selling family-focused finance books including Baby or Bust (Wiley) and Investing in Your Child’s Future (Wiley).


Main image source: vectorfusionart (Shutterstock)

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