- How accurate is your fund’s retirement forecast?
- 1. Investment returns are fixed, whatever your investment option
- 2. You will retire at 67
- 3. Super contributions remain the same over your working life
- 4. Income and super rules won’t change before you retire
- 5. Savings outside super aren’t included
- 6. Adding the Age Pension
- Standard assumptions not applicable to you?
Australians are currently receiving annual member statements from their super funds. When opening these statements, many super fund members will see a comforting projection of how much their account balance is likely to be when they retire, and how much income this account balance will provide each year in retirement.
Although these forecasts can be useful for getting an idea of how you are going when it comes to your retirement savings, such forecasts are not a guarantee of how much you will get when you finally decide to retire from the workforce. What amount you actually receive is likely to be very different from your super fund’s forecast of your final retirement benefit. The forecast is officially called a ‘retirement estimate’.
Note: It is not mandatory for super funds to provide a forecast, that is, a retirement estimate, for a super fund member on their annual statement. Some of Australia’s biggest super funds choose not to include retirement estimates on member statements. Note also that the rules governing retirement estimates don’t cover defined benefit super funds, which means Australians in these types of super funds are unlikely to see a retirement estimate on their statement.
How accurate is your fund’s retirement forecast?
If your annual statement includes a retirement estimate (a forecast of your final account balance on retirement, and a projection of your retirement income), it’s worth taking a few minutes to understand how your super fund has calculated these two figures.
Like all projections, if your situation is different to any of the key assumptions used when calculating your retirement estimate, your actual retirement lump sum and the retirement estimate supplied by your super fund could be poles apart.
In calculating your retirement estimate, your super fund is required to follow a standard formula set out by financial services regulator, ASIC, in Regulatory Guide 229. ASIC believes this standardised formula is the best way for super funds to estimate retirement benefits, rather than allowing each super fund to develop projections based on its own assumptions.
Under this standardised formula, super funds are not permitted to calculate a tailored, personalised retirement estimate based on your particular situation, as such an estimate is considered ‘personal advice’, which can only be provided by a licensed financial adviser with detailed supporting documentation. A limited number of super funds may provide more tailored forecasts when issuing member statements, but such estimates would need to be accompanied by a Statement of Advice (For more information about personal advice, see SuperGuide articles What are the different types of financial advice available? and What happens when you meet with a financial adviser.
According to ASIC, the purpose of your annual retirement estimate is “not to give an exact prediction of a member’s end benefit”, but to provide an “accessible starting point” so you get more involved in saving enough to ensure you have the retirement lifestyle you want.
Important note: Your super fund’s retirement estimate is not an accurate picture of your retirement, it’s just a guess based on a standardised formula.
According to ASIC’s Regulatory Guide 229, a superannuation forecast is:
“…an estimate provided to a super fund member of the balance of their superannuation investment at retirement, taking into account their current account balance, the impact of fees, and assumptions about future contributions, earnings and other matters.
A superannuation forecast may be generated by the provider of the superannuation product and provided to a member in the form of a statement (referred to in this guide as a ‘retirement estimate’). It may also be provided in the form of a calculator involving, to some extent, the input of certain information by members themselves. “
The 6 facts outlined below relate to retirement estimates provided by super funds. For information about the other type of forecast mentioned by ASIC, that is, super fund calculators, see SuperGuide articles How reliable are retirement income calculators? and How to select a retirement income calculator.
Your retirement estimate: 6 facts you need to know
If your super fund supplies you with a retirement estimate using the standardised formula, your fund is required by ASIC to calculate your retirement estimate using 5 assumptions about your future plans and the investment returns your super account will receive: If your super fund chooses to include your Age Pension entitlement in your retirement estimate, then further assumptions must be used (see Fact 6 below).
1. Investment returns are fixed, whatever your investment option
Under ASIC’s formula, your retirement estimate assumes your super account will receive a standard investment return of 3% per year after taking into account inflation and investment fees – regardless of the investment option you have selected. This earnings rate is also after tax and insurance premiums have been deducted by the super fund.
ASIC sets a standardised real investment return to ensure super funds do not base their calculation on the investment return achieved in years when your investment option performs well, as this would inflate the estimate of your account balance when you retire. A real return is an investment return after adjusting for inflation.
Most super fund members, however, will find that a retirement estimate based on a 3% p.a. real investment return (after taking into account inflation, fees and cost, and tax) is unlikely to be accurate for the investment return they receive each year until retirement. It’s worth remembering the investment return for any asset class – whether it’s shares, property or bonds – is never the same each year and can be both higher and lower than the standardised investment return.
If you have selected an investment option with an expected real return significantly different from the standardised 3% per year (after taking into account inflation, fees and costs, and tax). – such as a High Growth or All Shares investment option – your retirement estimate is likely to be misleading. For example, in the 2016/2017 financial year the median investment return for the Growth investment option in a super fund was 10.8% (after tax and after most fees but not taking into account inflation), while the median result for the Conservative investment option was 5.4% (after tax and most fees, but not accounting for inflation).
For more information on investment options and the variation in returns, see the following Superguides articles:
- Super fund performance: Financial years (to June 2018)
- Best performing super funds over 5 calendar years (to December 2018)
- Super investing: Should you change your investment option?
- Super investing: How to change your investment option
2. You will retire at 67
ASIC’s formula assumes you will retire at age 67, and a fixed amount of income from your super savings will be paid to you every year for the following 25 years.
Although this may be nothing like what you plan for your retirement, ASIC believes using a standard retirement age for retirement estimates means super fund members get a consistent picture over time from the annual retirement estimates they receive from their super fund.
3. Super contributions remain the same over your working life
Your retirement estimate is based on the super contributions that went into your account over the previous 12 months and these are assumed to remain constant over all the years until your retirement.
If you receive a pay increase and your employer is required to make higher Superannuation Guarantee (SG) contributions on your behalf, or if you choose to only work part-time in the years before retirement (and so have lower SG contributions), or if you make a large one-off contribution in a particular year, these changes will affect the accuracy of your retirement estimate. For more information about SG contributions, see SuperGuide article Superannuation Guarantee rules for employers.
4. Income and super rules won’t change before you retire
Although it’s unlikely to happen given our politicians love for tinkering with the rules governing the super system, the retirement estimate calculated by your super fund assumes the current taxation rules and other legal factors governing super are not going to change in the future.
Your retirement estimate assumes the guidelines will remain unchanged between the date your super fund calculates your retirement amount and annual retirement income and the date when you decide you want to retire.
Note: The annual income stream amount in a retirement estimate does not take into account any income tax you are required to pay on that amount.
5. Savings outside super aren’t included
The retirement estimate by your super fund does not include any investment assets or savings you and your partner have outside your super account, such as an investment property, shares or term deposits. Also, the estimate omits any super account balance you or your partner have in any other super fund.
Some people have significant investment assets, apart from the savings in their super account, so the retirement estimate you see on your annual statement could be much lower than the total amount you have saved for your retirement.
Note: Your annual retirement estimate supplied by your super fund includes the actual cost of insurance premiums and the administration fees paid by your super account over the previous 12 months.
6. Adding the Age Pension
Some super funds choose to include the Age Pension in the estimate of the annual retirement income your super account balance will generate, based on the current eligibility rules for the Age Pension. This inclusion is not compulsory, however, and your super fund may decide to only estimate the lump sum amount and the annual income this will generate when you retire.
If your super fund includes an estimate of your Age Pension benefit, ASIC again requires the super fund to make several assumptions that may or may not apply to your particular situation. The super fund is required to assume:
- You have a partner
- You and your partner jointly own your own home
- You and your partner’s total super savings amount is the same as your total super account balance
- Your total super account balance is used to purchase a super pension on the date of the estimate
- You and your partner have no other assets or income outside super that could affect the amount of Age Pension payments you are entitled to receive.
Standard assumptions not applicable to you?
If the assumptions used by your super fund are not accurate for your personal situation, the retirement income estimate calculated by your fund is unlikely to be very accurate. It may be worth creating your own retirement projection using an online calculator like ASIC’s Money Smart retirement planner or one provided by your super fund.
For more about retirement calculators, see the following SuperGuide articles:
For more information about retirement planning, see the following SuperGuide articles: