Update to Super Consumers Australia Retirement Savings Targets Methodology
In updating the Retirement Savings Targets for 2025, we have made methodology changes to improve the robustness of the model and adjust for updated Government forecasts for future productivity growth, which impacts the growth of the Age Pension.1 The changes were:
- Adjust the sample used to generate the spending targets.
- Update the bootstrap methodology for generating real return paths.
- Include historical Australian Bank Bill returns and Australian Bond returns in the calibrated long-run constructed portfolio.
- Adjust the Age Pension projection by lowering productivity growth assumption (real wage growth) to align with the updated Intergenerational Report,2 and incorporate the legislated indexing/benchmarking for Age Pension growth.
Purpose of SCA retirement savings targets
Super Consumers Australia’s retirement savings targets aim to answer the seminal question “how much do I need in my super to retire?”.
Our retirement savings targets are a set of targets that aims to help people understand typical spending needs in retirement, and how much super is needed to fund that spending. We publish the targets for two cohorts, those aged around 65 and those aged 55. For both cohorts we start retirement when they turn 65. The three spending levels are based on the 30th, 50th, and 70th percentile spending of retirees.
Methodology Changes
1. Spending targets
In this methodological update we removed multigenerational households from our sample to estimate household expenditure totals. As our targets are for singles or couples only, including multi-generational households created lower estimated expenditure particularly for the high expenditure group. This is because of lower shared expenditure through the use of equivalence scales. Since our targets are for single and couple households we felt removing larger households from the sample was appropriate.
2. Bootstrap methodology
Our retirement savings target models bootstraps returns for a constructed 60/40 growth/defensive investment portfolio3 held from age 65 to 90 (26 years). The model generates 10,000 paths of 26 years of annual returns by randomly drawing observations from an empirical distribution of historical returns from the constructed investment portfolio.
In reviewing the existing methodology,4 we found a few elements of the bootstrap methodology could be improved. These were:
- Sampling real returns instead of nominal returns.
- Sampling monthly returns instead of annual returns where overlapping periods were previously used.
- Include historical Australian Bank Bill returns and Australian Bond returns in the calibrated long-run constructed portfolio real return mean.
- Calibrate to a historical arithmetic average instead of a geometric average.
3. Age Pension assumptions
The Age Pension projection was affected by two changes: the real wage growth assumption and the benchmarking of the Age Pension.
Productivity assumption
We have lowered the productivity assumption from 1.5% to 1.2% in line with the latest estimates from the 2023 Intergenerational Report. The productivity assumption is used as a proxy for real wage growth which affects the growth in the real Age Pension.
ASIC recently consulted publicly on revising its estimate of productivity from 1.5% to 1.2%, which we supported.5
Age Pension benchmark
The retirement savings target model has been adjusted to account for the legislated indexing of the Age Pension. The legislated indexing has two components. An increase in the cost of living for pensions (LCI or CPI) and a benchmark to male total average weekly earnings (MTAWE).
Currently, the MTAWE benchmark is below the Age Pension. In real terms it will take around 10 years to over-take the real Age Pension using LCI/CPI indexing.6
1We thank members of our Research Advisory Council and the University of Melbourne Department of Finance for feedback on these changes.
2https://treasury.gov.au/publication/2023-intergenerational-report
3The portfolio consists of the following: 26.4% Australian Equities, 26.4% World Equities, 7.2% Australian Listed Property, 16% Australian Fixed Interest, 16% World Fixed Interest, 8% Cash.
4The model was developed with the assistance of Geoff Warren and Gaurav Khemka from ANU.