✔ Fred earns $70,000 a year. For retirement, the optimistic Australian will be expecting Fred to have enough super and other savings to support an income of between $42,000 and $56,000 a year in today’s dollars. (Expressing amounts in today’s dollars allows you to compare a benefit expected to be received at some time in the future with what you could buy with that money today. See Chapter 3 for more information on today’s dollars.)
✔ Fred is aged 35 and currently has no super since he was previously studying and then self-employed and didn’t make any super contributions. He will receive 35 years of Superannuation Guarantee (SG) – that is, compulsory superannuation contributions paid by his employer – and can assume his current income of $70,000 a year increases over time. SG contributions represent the equivalent of 9.5 per cent of an employee’s salary (each year from 1 July 2014 until 30 June 2021, then SG gradually increases until it reaches 12 per cent from July 2025). If Fred makes no additional super contributions, then he’s going to end up with around $500,000 in today’s dollars when he retires at age 70 (the Age Pension age for anyone born after December 1965 is age 70, subject to legislation). For the calculation I have assumed 7 per cent return after taxes, less $100 a year for a life insurance premium, and 3 per cent inflation. The final figure may vary by a few thousand dollars depending on the investment returns that his fund actually delivers, and the fees that his fund charges.
✔ If Fred retires with a $500,000 super benefit (refer to the preceding point) in today’s dollars that would deliver Fred a retirement income of around $50,000 a year (indexed), including his potential Age Pension entitlement. But his super money will run out by the time Fred is 90 years of age, and then he must rely solely on the Age Pension.
✔ If Fred wants his super to last until he is 100, then he should expect a retirement income of just over $43,000 a year (indexed), which would include his Age Pension entitlement, and work out to be just over 60 per cent of his working income. It is unlikely Fred will have to pay tax on his retirement income (for more information on how taxation affects super benefits, see Chapter 19).
✔ If Fred doesn’t plan to receive 35 years of SG employer contributions representing at least 9.5 per cent (and Australians retiring within the next three decades will not), or he doesn’t plan to wait until age 70 to retire, or he believes 60 per cent of his before-tax working salary is not enough to live on in a retirement that may span 30 years, then he needs to starting thinking about super-boosting strategies (such as making voluntary super contributions, as I explain in Chapters 4 and 22).
Living into your eighties and nineties
The number of Aussies over the age of 85 is projected to quadruple by 2050, and the number of people aged 65 to 84 years is expected to double by 2050, according to the Australian government’s 2010 Intergenerational Report.
The report, published every five years or so, basically identifies the issues that Australia will face with an ageing population. According to projections in the 2010 report, men born in 2050 will have a life expectancy at birth, on average, of 87.7 years, while women can expect to live to the age of 90.5 years. Men and women aged 60 in 2050 will have a life expectancy (89.2 and 91.4 years respectively) roughly five years longer than men and women aged 60 in 2010 (83.4 and 86.6 years respectively).
Some experts say that of females born today, one in two women are expected to reach the magnificent age of 100, which to be honest I find difficult to believe. But if it’s true, the Queen (or King) is going to be very busy sending out birthday greetings to so many centenarians.
Appreciating a Super Fund’s DNA
Trying to describe what makes up a superannuation fund is a bit like describing the body of a human being: I know one when I see one. What you do need to understand is that a super fund has key elements that make it very different from a bank account, or a managed fund, where the money of many investors is pooled into one investment vehicle (for more information about managed funds, see Chapter 14).
A superannuation fund is very similar to the human body – really. Without being risque, picture the human body for a moment. Your mental image of the body may have dark skin, and a head with brown hair and blue eyes. Or, the body may be very tall with a head that has no hair. Or perhaps an image of a Hollywood actor, such as Cate Blanchett, Hugh Jackman or Nicole Kidman, pops into your head?
Irrespective of what type of body you pictured, under all the clothes, your human body is the same as everyone else’s. Each body normally has a head, two arms, two eyes and a torso. The shape and size may differ, but you know what a human body looks like and what identifying features allow you to know it is a body.
Just like the human body, your superannuation fund also has key distinguishing features that identify it as a super fund.
✔ An obvious name: The word ‘superannuation’ or ‘super’ appears in the fund’s name.
✔ Trustee: A ‘trustee’ or ‘trustee board’ runs the fund (I explain the role of the trustee in Chapters 7, 8 and 9). The only superannuation vehicle that doesn’t have a trustee is a Retirement Savings Account (RSA). For more information about this type of account, see the section ‘Discovering seven fund types on your super safari’ later in this chapter. I explain different types of super funds in the next section.
✔ Governing rules: A ‘trust deed’ (or, for a public sector fund, the governing rules in the form of an Act of Parliament) sets out the rules for running the fund. (I explain the importance of a trust deed in Chapter 7.)
✔ Regulated fund: The trustees ‘elect’ the Superannuation Industry (Supervision) Act 1993 (SIS Act) – the statutory bible for all superannuation funds – to regulate the fund. (I explain the SIS Act in Chapters 9 and 11, later in this book.)
✔ Complying fund: The fund has complying fund status; that is, the fund has followed all the rules set out in the SIS Act, including complying with the fund’s trust deed.
✔ APRA licence or operates as a SMSF: If the super fund is not a self-managed super fund (SMSF), then the trustee must have an RSE licence from the Australian Prudential Regulation Authority (APRA) and the fund must be registered. RSE stands for ‘registrable superannuation entity’. (For information about APRA and RSE licences, refer to Chapter 1.) If you run a SMSF, your fund does not need an APRA licence, although you and the other trustees will need to be vetted by the Australian