Nowadays you can expect just about every super fund website to provide an online retirement calculator which can help members track how much money they are likely to have in their super account at retirement, and how long these retirement savings will last.
If the calculator’s figures look good, most super fund members think their retirement plans will be just fine.
Before accepting that your super fund’s retirement calculator is able to accurately predict the future, it’s worth understanding a little about how these retirement simulators work.
Note: This article covers online calculators that make projections for Australians in accumulation (also known as defined contribution) funds. Most online retirement calculators are unable to project the retirement income of super fund members in a defined benefit super scheme.
Reasonable or not? Rules for super calculators
The essential thing to understand when using an online calculator is that retirement calculators are not a crystal ball: they are just a glorified bundle of spreadsheets that use a whole series of assumptions about what will happen in the future to spit out a projected retirement balance.
According to ASIC’s Regulatory Guide 167, super fund calculators need to have a “reasonable basis for the assumptions” they use, but the regulator does not set specific rules for key variables like investment returns. The choice of selected variables is up to the particular super fund.
This discretion given to super funds means the assumptions used in retirement calculators vary significantly, but as long as they are “reasonable” ASIC accepts them. The problem with this discretionary approach is it leads to inconsistency between retirement calculators and can seriously mislead users about how much they need to save for retirement and how long it will last.
Back in November 2015, one of the leading super industry consultants, Chant West, conducted research comparing the retirement projections from ASIC’s MoneySmart super calculator and those from seven of the largest super funds in Australia. According to Chant West, there was a 55% difference between the highest projected retirement amount of $376,809 and the lowest (which was from ASIC’s calculator) at $242,081.
Default returns: assumptions matter
When it comes to getting an accurate projection of your retirement balance, the assumptions used within an online calculator, to create the final calculation, really matter. Different assumptions lead to very different outcomes, particularly when it comes to investment returns over the 20 or 30 years you may be saving for your retirement.
When projecting your future account balance, some super funds use investment returns before fees and taxes, while others use investment return after tax and fees, and still others use a mix.
Also, no consistency exists between the assumed investment returns for the typical investment options offered to members in a super fund. The Chant West research found the annual investment return assumed for the default growth investment option of super funds varied between 5.75% and 6.5%.
Even on a straightforward investment option like cash, SuperGuide found one industry super fund assumed a default investment return of 2.9%, while a retail super fund retirement calculator assumed the investment return was 4.85%. For growth investment options (70% growth and 30% defensive assets), default investment returns ranged from 4.8% for ASIC’s MoneySmart calculator through to 7.0% for a large corporate super fund.
Although these percentage differences don’t sound like much, over a 30-year period saving for retirement, the difference in a super fund member’s final account balance would be enormous.
Important: Some super funds use different assumed investment returns for the same investment option depending on whether the member is still saving for retirement or is already in retirement.
For more information about investment options and the variation in returns, see the following SuperGuide articles:
- Super investing: Should you change your investment option?
- Super investing: How to change your investment option
- Super investing: What is your risk profile?
- The 10/30/60 rule: What it is, and how it can help your retirement plans
Investment returns: every year is different
Another common problem with retirement calculators is that most of them assume the investment return you receive on your account balance stays exactly the same across the entire period you are saving for retirement, or while you are in retirement.
Retirement calculators tend to use a long-term average investment return and assume it will be the same each and every year over the period being calculated, which could be as long as 20 or 30 years.
Investment returns for any asset are never the same year in, year out, so the result shown by the retirement calculator is really just a guess. Younger super fund members may find the ups and downs in the investment returns they receive over 30 years even out over time to be somewhere near the average, but older super fund members are unlikely to have sufficient time to see the gyrations of investment markets smoothed out in the same way.
Although online calculators all include warnings in their instructions and assumptions about the risks involved in using long-term average investment returns, few members really understand the limitations of this approach.
Tip: If you expect to receive the long-term average investment return on your retirement savings it may give you a false sense of optimism about your retirement. The longer you invest the more likely you are to face at least one year of poor or negative investment returns if your investment option includes assets like shares or property.
For more information on investment risk and investment returns over time, see the following SuperGuide articles:
- Super control: How to switch your super account’s investment option
- Super investing: What is your risk profile?
- Super fund performance: Calendar years (to December 2018)
- Best performing super funds over 5 calendar years (to December 2018)
- Best performing pension funds over 5 calendar years (to December 2018)
- Best performing super funds over 1 financial year (to June 2018)
Tax and wage growth: yet more assumptions
If all this uncertainty isn’t enough, retirement calculators make widely varied assumptions about other important figures like tax rates and inflation.
The Chant West study found the tax rate assumed by different super funds was anywhere between 7% and 9%, with no allowance made for any deductions or offsets the super fund received.
Retirement calculators are also pretty optimistic when it comes to wage growth for super fund members still in the workforce. Overly optimistic assumptions about wage and salary growth mean the retirement calculator expects you will receive higher SG contributions than are likely to occur.
Several of the calculators SuperGuide looked at are assuming 3.5% and 4% annual growth in wages, which is high given the current record low annual wages growth of around 1.9% for private sector employees and 2.4% for the public sector.
How to make a retirement calculator more useful
Remember, retirement calculators are just a model or illustration; they cannot predict the future. The amount of money they project you will have in your super account on retirement, and how long it will last when you are actually in retirement, is only an estimate and is NOT guaranteed, so you shouldn’t rely on it when making your retirement plans.
Before using a retirement calculator it’s important to read some of the boring small print included with every calculator and click on the assumption tab. If you don’t think the assumptions suit your personal situation (or your partner’s situation), or are unrealistic (such as an investment return that’s too high), make sure you change them.
Tip: It’s important to recheck your projection from time to time, because your personal circumstances, investment market returns and the tax rules change regularly. Updating your information and tweaking the retirement calculator’s assumptions will give you a more accurate result and help you feel more comfortable about your retirement plans.
For some handy tips about how to pick a good retirement calculator, see SuperGuide article How to select a retirement income calculator.