Why $1 million in super might not be enough



Australians who save $1 million for their retirement would fare little better than those on the government pension, one of the country’s leading superannuation experts has warned.

The chair of the 2010 Cooper Review, Jeremy Cooper, said a $1 million nest egg used to fund a lifetime income in the current interest rate environment would deliver about $1297 a fortnight – the same as the government pension.

“Assumptions and assertions that $500,000, or even $1 million, in super, in the current environment, will guarantee a comfortable retirement are suspect,” Mr Cooper, who is currently chairman of retirement income at Challenger, wrote in The Australian Financial Review on Monday.

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“The brutal reality is that a fair price for an age pension in today’s interest rate environment is around $1 million. For that amount, a couple will get $33,717 of income a year. A comfortable retirement would cost more.”

Mr Cooper’s statement comes at a time when the cost of the ageing population in the spotlight, as the government struggles to find savings in the upcoming budget.

Last month’s intergenerational report found that by 2055, Australians’ life expectancy would have climbed to 95.1 years for men and 96.6 for women, compared with 91.5 and 93.6 for people born today.

One popular solution to the budget deficit has been to cut super tax concessions. But Mr Cooper said this could cause more problems than it solves.

“In the quest to ensure our super taxes are equitable, there’s the potential for heavy collateral damage to be sustained to a large cohort of the people we’re trying to help. These are the middle-income households hoping to accumulate sufficient nest eggs to mainly self-fund a reasonably comfortable retirement,” said Mr Cooper.

Mr Cooper’s figure of $1.02 million is based on current government 10-year bond rates of 2.30 per cent. At rates of 6 per cent – the 20 year average  – a pension would only cost $410,000.

The accuracy of this figure assumes that the entire $1 million lump sum is invested in government bonds, which in practice is rarely the case. Account-based pensions tend to spread money across a number of asset classes, including higher yielding assets such as shares and infrastructure.

Jeremy Cooper works for annuity provider Challenger, which converts lump sums into guaranteed income streams. Rates of returns are linked to official interest rates, meaning they are generally lower than share returns, but also less risky.

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