There's been a subtle shift over the past decade from the view that retirement is a time for old people to garden, go to bingo and catch the occasional fish, to an expectation that when we retire we'll be able to do all the things we wanted to do but didn't have time for when we were working.

Some say the expectations are too high. "The ads make retirement look like a $5000 holiday every week," one critic quipped. But the fact remains: we've moved from a teabag-and-Sao-biscuit retirement to wanting cappuccinos and gourmet muffins.

The problem is that the growth in retirement expectations is fast outpacing the growth in retirement savings. And behind the scenes, this is prompting a heated debate over just how much super is enough.

"One of our ongoing concerns is that there is no agreed definition of what is adequate," says Philippa Smith, chief executive of the Association of Superannuation Funds of Australia.

"We have a generally agreed objective that the super system is there to improve on the adequacy of the age pension and to reduce reliance on the age pension, but there are no agreed targets. We need an agreed target before we can have sensible discussions on the combination of strategies we need to put in place to achieve it."

Smith says research for ASFA, conducted last year by ANOP Research, showed that less than 4 per cent of Australians believed they could live on less than $20,000 a year in retirement. The majority were wanting a retirement income in excess of $30,000 and many were looking for more than $40,000. Even low-income earners were aspiring to something better when they retired.

While 52 per cent of people now earning less than $20,000 estimated that the minimum retirement income they would need was less than $30,000, 22 per cent said they'd need a minimum of $30,000 to $50,000. (Seven per cent said they'd need $50,000 or more, and 19 per cent were unsure.)

While Smith concedes there may have been some wishful thinking in the survey, she is concerned about the growing gap between expectations and reality.

"Only a small number said they could live on $20,000 or less, but that is where compulsory super for 30 years for someone on average weekly earnings will get you."

The debate was reignited this week by the release of new research into the Australian system by CPA Australia. The accounting body commissioned the National Centre for Social and Economic Modelling to look at Australia's current compulsory super system in the context of people's living standards, work patterns and expectations.

It found that while compulsory super would lift retirement incomes well above the level of the age pension, it was unlikely most people would be able to maintain their standard of living once they retired. And most could certainly forget about living better.

"People are relying on that 9 per cent they'll get through compulsory super and thinking their lifestyle will be the same," says Murray Wyatt, chairman of CPA Australia's Superannuation Centre of Excellence.

"But what the report shows is that, if they meet the criteria, they'll have an income that is above a level that's modest but adequate (currently $13,260 for a single person and $19,500 for a couple). But to get there, they'll have to start making contributions at 25, with no periods out of the workforce or working part-time.

"It's also based on an after-inflation rate of return of 4.5 per cent by the super fund, which is a tough rate long-term. It assumes you won't retire until 65, but retirement isn't always voluntary. A growing number of people are retiring because of ill health or a job restructure.

"The sensitivity of your retirement lifestyle to these factors is quite strong, and we need to get people to reconcile their expectations with the results."

The most alarming aspect of the CPA research is that it used living standards, rather than incomes, as the basis for the comparisons.

When we think of retirement, most of us think in terms of our current income and expenses. But in reality, retirement finances are quite different.

Most retirees, for example, don't have to pay hefty costs like mortgage repayments and school fees. Nor do they have to travel to work, or contribute to super. Health costs tend to be higher at this end of the population, but most of the experts agree you can maintain your lifestyle in retirement for less than you earned before you retired.

The CPA study looked at living standards after taking out tax, mortgage costs and super contributions. But the base figures didn't factor in added health costs.

Then there's lower tax. While the Federal Government boosted the tax concessions for retirees of age-pension age in the last federal budget, this is only the tip of the iceberg. Bridges Financial Services head of strategy Ross Johnston says retirees earn their income from investments, which gives them more flexibility and tax breaks than people living off salary.

He says a single salary earner on $30,000 a year would have $25,600 to live on after tax. But if a retiree earned $30,000 from a retirement product like an allocated pension, no tax would be payable, so the retiree would have the full $30,000. That's around 17 per cent extra after-tax income.

And it gets better. While couples are not allowed to take one partner's salary and split it for tax purposes, it's perfectly legitimate for couples to hold investments, and earn income from them, in both names.

Johnston says a retiree couple, each with an allocated pension, can earn up to $52,800 a year before they have to pay tax. He says they'd need roughly $75,000 to $80,000 to generate the same after-tax income if they were working.

Lower-income earners can also use franking credits from investments like shares or managed funds to boost their after-tax income. Johnston says a couple who could split $30,000 of 50-per-cent-franked income between them would not only pay no tax on that income; they'd also be entitled to a tax refund of their excess franking credits, boosting their after-tax income to above $30,000.

Johnston says the average Bridges retiree client has a lump sum of around $120,000. While this isn't a fortune, he says a financial planner can ensure they get a tax-free income of around $20,000 a year including the age pension. But, ironically, it is often the retirees with more money who get the full benefits of the tax concessions available, as they can afford to see a financial adviser.

"People often come in who have their money in term deposits and are paying tax when there's no reason to do so," Johnston says.

Because of the combination of tax breaks and lower spending, most people agree retirees can maintain their standard of living on a lower income than they earned before retirement. This means many of us can maintain our lifestyle on less than we think we could.

But even if our expectations are higher than they need to be, the chances are that many Australians will be disappointed.

Dr David Knox, a director of PricewaterhouseCoopers Actuarial, says the consensus worldwide is that middle-income earners need 60 to 75 per cent of their pre- retirement income to maintain their living standards in retirement. But while middle-income earners are likely to own their own home by the time they retire, lower-income earners may still be renting and incurring the same level of housing costs.

Lower earners too, he says, are unlikely to have spent up on things like school fees while they were working and so will need a higher proportion of their pre-retirement income to maintain the status quo.

"Lower-income earners are struggling already and don't have a lot of disposable income," he says.

"There are a number of reasons to say the percentage of pre-retirement income that you need declines as you move up the income scale. It's not a straight line, but there may be an argument that Social Security recipients need 100 per cent of their pre-retirement income and high-income earners - say, those earning $200,000-plus - need only around 50 per cent because of the cost savings. Most, however, would fall into that 60to 75 per cent group."

According to ASFA, average-income earners on $40,000 will need savings of more than $385,000 to give them a $30,000 retirement income for 20 years. The amount needed rises significantly if they retire earlier or live longer.

To achieve that income, a 25-year-old on average weekly earnings will need to set aside 15 per cent of income each year until age 65, assuming the super fund earns 7 per cent a year.

"Even with compulsory super at 9 per cent, the bulk of the population will still be on a full or part age pension," says Knox.

"If you're saying people start work at 20 and work full-time to 65, it is unrealistic for most people. In that context, 9 per cent won't be enough."

As a base, Knox believes compulsory super should be lifted to 12 per cent, with incentives for those who want to save more to do so.

He also favours some type of "insurance" or pooling system to share the costs of people living longer than they anticipated.

"One of the dangers is that people will say they need more money just in case they live to 95," he says. "My suggestion is that they fund themselves to, say, 85 or 90, and beyond that we have some form of community sharing."

Wyatt says the CPA study has highlighted the need for greater savings. The report looked at three options that would increase retirement living standards by roughly 15 per cent:

• An extra 3 per cent after-tax contribution by employees.
• An extra 6 per cent contribution by employers.
• Abolishing the taxes on super contributions and fund earnings.

"The report is a wake-up call," he says. "People need to address their own circumstances or they will be terribly disappointed."

Contributions needed for a $30,000 retirement income
(Including 9% compulsory super)

Retirement age	Final salary
	$40,000	$60,000
55	23%	16%
60	18%	12%
65	15%	10%

Assumes you start at 25, get a 7 per cent return from your super fund, pay 15 per cent contributions tax, and your salary grows by 3.75 per cent a year. SOURCE: ASFA

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