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Smart Investing
Young savers need to rethink the super saving plan
 July 29, 2007
Robin Bowerman
A revealing insight this week into how well we are saving for retirement contained a bitter/sweet message for the younger generation.
The good news for the baby boomers is that after several years of exceptionally strong asset growth their super savings are doing better than expected and if it continues like this then a more comfortable retirement than many previous studies predicted is on the horizon.
But the new research study by Access Economics highlights the particular challenges facing younger workers if they want to enjoy the same comforts in retirement.
Access Economics has produced a major piece of work using data from 320,000 members of AMP corporate super plans. The result is the AMP Superannuation Adequacy Index which is to be published half-yearly and it provides a real-world scorecard of just what the savings of a large cross-section of the Australian population looks like.
Access has set 65% of pre-retirement living standards as the benchmark people need to aim for to achieve a comfortable retirement.
The good news is that thanks to strong growth markets and increasing levels of super contributions among older age groups about 7 million Australians are on track for an adequate retirement. But some 1.9 million Australians under the age of 40 are falling behind the income adequacy measure – and falling behind in a significant way with Access Economics estimating that average retirement incomes will fall short of the benchmark by 13.5% which is about $97 a week in today’s dollars.
What has worked well for the older baby boomer generation is that as they have moved into middle age and paid down the mortgage and finally emptied the nest they have been able to ramp up their super savings. According to the AMP data studied by Access Economics people between the age of 55 and 64 on average are contributing almost 20% to super and that has paid off with the strong sharemarket and property returns coupled with super’s tax advantages.
According to the research the contribution rates do not start to climb significantly until people hit 50. For baby boomers this strategy looks like it will work – although it is always worth remembering the risk factor that in today’s defined contribution super world the market risk is borne by the individual members and markets can give but also take away.
And of course the new simpler super regime that makes pension payments tax-free past the age of 60 provides a real fillip to living standards.
But the tradeoff for the tax simplification was restrictions on undeducted contributions. So the capacity for the next generation to get significant assets into super later in life has had a ceiling put on it of $150,000 a year or $450,000 in any three-year period.
So the sprint to the super tax advantage line when you are say within 10 years of retirement may not work nearly as well for Generation X or Generation Y particularly if market returns are more in line with long-term averages.
That is not discounting the advantage that younger workers have with the benefit of 9% super guarantee payments through their entire working life. But the Access Economics research shows that 9% will not be enough. Indeed the forecast is 35% of Australians under the age of 40 today “will not achieve the savings they need for a comfortable retirement”.
That is clearly going to mean some sacrifices – either sooner or later. But acting sooner means a lot less pain courtesy of the effect of long-term compounding on the investment returns. People under the age of 40 ought to be targeting 15%-18% super contributions instead of the mandatory 9% if they want to achieve the retirement income benchmark Access Economics has set. One relatively pain-free way of doing that is to increase your salary sacrifice contributions 1% a year – perhaps timed around annual pay review or bonus period.
For younger generations the super game plan needs to change quickly. Now it is all about regular contributions over the long-term.
More articles from this week's newsletter:
International investing: Chinese whispers
Resident trader: Learn from your losing trades
Commodities: Which is the most popular to trade?
US plunge: Markets around the world are marching in lock step
Commodities: Uranium & iron ore on fire
Shares: Why technical analysis matters
Stock of the week: ADO
Warrants: Instalment pricing explained
Shares: Chief ratios for stock hunters
Shares: Earnings yield an omen of doom?
Super: The Y2K of super in 2007
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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