Find your super sweet spot
We're encouraged to grow super savings throughout our working lives, but having too much super can work against us. Effie Zahos shows you how to find your super sweet spot.
“How much super do I need?” It’s a common question, and a grey area for many Australians. That’s not surprising. A quick online search shows a variety of ‘rules of thumb’ about how much super we need in retirement. What many people don’t realise is that having too much in super can work against us.
About Effie Zahos
Effie Zahos is Chief Content Officer and Money Commentator at InvestSMART. She is one of Australia's leading personal finance commentators with more than two decades of experience helping Australians make the most of their money. A regular money expert on Channel 9's Today Show and on radio around Australia, Effie is also the author of The Great $20 Adventure, A Real Girl's Guide to Money and Ditch the Debt and Get Rich. Passionate about financial literacy, Effie sits on the board of directors for Ecstra, a not-for-profit organisation committed to building the financial capability of all Australians.
As our super system matures, retirement incomes are increasingly likely to be made up of a blend of the Age Pension plus returns on super.
The catch is that super is included in the pension assets test. The more you have in super, the less you could receive from the pension.
As the table below shows, a couple who own their home can have up to $451,500 in assets (including super) to receive a full Age Pension. From there, the pension reduces as asset values rise, cutting out altogether once a couple’s combined assets top $1,012,500.
| Lower threshold | Upper threshold | |
| Singles | $301,750 | $674,000 |
| Couples (combined) | $451,500 | $1,012,500 |
Source: Services Australia
The challenge is working out the level of super that lets you maximise the combined income from super and Age Pension payments – in other words, your super sweet spot.
The thing to watch for is the ‘taper rate trap’. This applies when the value of your assets lies between the minimum and maximum pension thresholds. In other words, you’re eligible for some sort of pension payment, just not the full amount.
Under the taper rate, retirees lose $3 of fortnightly pension for every $1,000 of assets above the lower asset threshold.
For example, a single retiree with assets of $302,750, which is $1,000 above the full pension benchmark, will have their pension entitlements cut by $3 each fortnight. Over the course of a year that works out to $78.
This may not sound like much. However, for some retirees the taper rate can mean missing out on thousands of dollars in pension payments each year.
To compensate for this loss of income, a retiree would need to earn a return equal to 7.8% on those assets that exceed the maximum pension payment.
It may be possible to achieve that return in some years depending on your choice of investments. It’s a solid return to notch up year after year though, and it’s likely to mean taking on more risk than many retirees may be comfortable with
This is an area where exchange traded funds provider Betashares has crunched some numbers. As the table below shows, a single retiree with $300,000 in super can expect to receive about $28,005 in annual pension payments plus returns on super of approximately $15,750. That’s annual income totalling $43,755.
If the same retiree had amassed $600,000 in super, they would receive zero Age Pension, and earn returns on super of about $31,519 – that’s more than $12,000 less in annual income simply because they have a bigger nest egg.
| Value of super savings – single retiree | $300,000 | $600,000 |
| Annual Age Pension payments | $28,0051 | $01 |
| Annual income from super | $15,7502 | $31,5192 |
| Total annual income | $43,755 | $31,519 |
| Difference in annual income | $12,236 |
Source: Betashares. Figures assume a single retiree, homeowner, aged 67.
1Pension payments impacted marginally by income test via deeming rates.
2 Assuming 5% return on investments.
The taper rate can make it seem counterproductive to build your super balance. Remember though, as Age Pension eligibility thresholds change at least annually, there is no set-in-cement figure for your super sweet spot.
Moreover, our ageing population makes it likely the rules around super and the pension will continue to evolve in the future.
The upshot is that the taper rate trap isn’t a cue to stop growing your super. What matters is that you are aware of the issue as you head towards retirement.
The Moneysmart website features a calculator that provides an estimate of likely retirement income based on accumulated super plus pension payments.
If you’re close to hanging up your work boots, it’s worth talking to Centrelink’s free Financial Information Service on 132 300, or speaking to a financial adviser.
It’s all about tapping into every resource to make informed decisions and plan ahead.
This article first appeared on InvestSMART. You can sign up to get a free newsletter, with fortnightly insights from InvestSMART’s team of experts including Paul Clitheroe and Effie Zahos.
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