The compulsory superannuation contribution rate is
set to increase by 0.5% each year for the next six years (i.e. from 9.5% to 12%) beginning from 1 July 2021. It is understood that the Federal Government is considering postponing next year’s increase, due to concerns about whether the economy can afford these higher employment costs and at the same time as deal with the current economic challenges.
A lot of the commentary about superannuation, including whether next year’s contribution increase should be postponed, is often motivated by political and vested interests. Therefore, I thought it would be useful to cut through this rhetoric and focus on the facts alone (i.e. maths).
In particular, I wanted to focus on two questions; (1) how long will your super last after retirement, and (2) how important are higher contributions compared to investment returns and fees.
How long your super will last depends on what you spend
Obviously, a key determinant of how long your super balance will last is how much you spend. The less you spend, the longer your money will last – no surprises there!
The best way to assess how much money you will probably need in retirement (to maintain your current standard of living), is to base it on how much you spend today. Of course, it is likely that you will spend your money on different things, but the aggregate amount tends to be very similar (between when you are working to when you are retired).
This table sets out what people tend to spend, based on my experience. The
rule of thumb is that living expenses (see my definition of General Living Expenses
here) tend to be in the range of 40% and 50% of your gross employment income (but typically not less than $50,000 or more than $150,000).
Comparing annual contribution levels of 9.5%, 12% and 15%
In my analysis, I measured the impact of a 30-year-old contributing a total of between 9.5% and 15% of their income each year for 30 years i.e. until they are a
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