Monday 11 June 2007

How Much Will Someone On Minimum Wage Have In Retirement?

After the recent announcement of a 5.3% rise in the NSW minimum wage to $531 a week a thought occurred to me - just how muxh would a person who worked for the minimum wage all their working life end up with in their retirement account? A few assumptions to start off with:
* the person is starting working full-time today at 18 yrs of age, and gets paid the adult minimum wage.
* the person never gets a pay rise or a promotion beyond the changes in the minimum wage
* the minimum wage from now on only rises in line with the CPI and not the average wage (this is very conservative, as the minimum wage generally rises at least as fast as the average wage in NSW)
* the person works fulltime until they retire at age 65
* the person manages to contribute $1000 pa ($2.74 a day) into their superannuation account from their take-home pay (in case this seems a big ask for someone on the minimum wage, bear in mind that you can earn an extra $100 a week just doing a paper round for 2 hours in the morning before work, 5 days a week).
* they get the 9% compulsory SGL contribution paid into their account by their employer each year. The current 15% contribution tax rate applies to this contribution.
* current rules apply, so they get the governments $1,500 co-contribution each year.
* their contribution and the co-contribution increase each year with the CPI
* their superannuation is invested in a high growth option that returns an average of 8% net over the 47 years they are working. Inflation averages 3% over this same period, so they get an average net real return of 5% pa
* There is no tax payable when they withdraw their superannuation balance when they retire at 65 (ie. the new Simpler Super rules still apply).

So, what amount of money (in today's dollars) would this person end up with when they reach 65?

$881,862 in today's dollars! ie. the equivalent of nearly 32 years wages.

If they withdrew this money as a tax-free pension at the rate of 5% of the balance each year (so if they kept the same investment mix during retirement the real value of the fund should be maintained indefinitely) they would receive a pension of $44,093 pa, or 160% of their pre-retirement wage (and tax free!)

Of course this scenario won't apply to most people starting work today - they can expect so time unemployed or working part-time. Some people starting work at 18 will die before reaching retirement age, or suffer permanent disability well before they reach 65. But the point is that the current superannuation system will "look after" the lowest paid workers very nicely, assuming they work full-time until 65 and also make their own $1000 pa contribution into their retirement fund rather than just rely on the employer's SGL contributions. (And assuming they don't select the "capital stable" or "conservative" investment options in the retirement account).

If the same person didn't put in the extra $2.74 per day that entitled them to the maximum $1500 government co-contribution they'd end up with "only" $407,099 at retirement, and at 5% withdrawal rate would receive a tax-free pension equivalent to 73.7% of the minimum wage (plus by entitled to receive the old age pension, assuming it is still available in 47 years time.

Enough Wealth

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