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Anyone who’s ever spent a few minutes popping numbers into their super fund’s online retirement calculator to find out if their retirement savings are on track knows it’s a confusing process.
Calculators ask lots of questions and produce some great charts, but they’re only as good as the information you put into them, or the assumptions used to build them.
So SuperGuide has created a list of 10 tips to consider when you are selecting your online retirement calculator.
Before you start using an online calculator
It’s important to do a little homework before you dive right in and start trying to work out what your retirement income is likely to be.
The first thing to think about is how much detail you want. Some people just want a quick idea of how they are travelling when it comes to their retirement savings, while others want a detailed projection of their financial future.
If you have a low account balance – or are in the default investment option for your super fund’s MySuper option – and you only want a rough idea of your account balance at retirement, your fund’s online retirement calculator will probably do the trick. It will give you a broad overview of how much you are likely to have when you retire and the amount of income this will provide in retirement.
If you have selected a different investment option, want to check a range of possible scenarios, or want a lot of detail about where your super account is likely to be at retirement, you may need to shop around.
You also need to consider when you would like to retire, as the age you leave the workforce will have a big impact on how long your super savings last.
10 tips for selecting a good retirement calculator
1. Compare results from several calculators
Comparing different online calculators may sound obvious, but few people bother to try several retirement calculators.
Every calculator is different, as super funds usually tweak the basic tool to suit their particular membership and the after-tax investment return objectives for each investment option, which may lead to very different results.
An effective way to get a realistic picture of how much you are likely to have in your super account at retirement, or to see how long your super savings are likely to last, is to compare the results from several calculators.
2. Change the personal assumptions
Depending on your personal circumstances, using the default assumptions in your super fund’s retirement calculator may not give you an accurate projection. Changing the pre-set figures (such as retirement age) will give you a much more personalised result.
If you want a higher level of retirement income, or plan to retire later than Age Pension age, make sure you are able to enter this information into the calculator. Otherwise the projection provided by the calculator will give you an inaccurate idea of how much you need to save and when your account balance is likely to run out.
Planned career breaks are also important to include, as missing out on Superannuation Guarantee (SG) contributions from your employer for several years can have a big impact on your final super account balance.
3. Check default investment returns
Retirement calculators generally assume a set investment return for each investment option in the super fund (such as cash, balanced or high growth) and base their projections on these investment returns.
Checking these pre-set returns and deciding whether you think they’re too optimistic is particularly important if you’re only a few years out from retirement. If the outlook for investment markets is poor, using an investment return based on past performance or one too high for future conditions, will result in an overly optimistic projection. You may also risk running out of money towards the end of your retirement.
4. Add the Age Pension
A good retirement calculator should create a retirement income projection that includes any eligibility for the Age Pension. Most Australians haven’t saved enough in their super accounts to fund their retirement entirely from their super savings, so they’re likely to receive at least a small part Age Pension – particularly in their final retirement years.
The best calculators include potential income from the Age Pension in their projections and show a graphic representation of the income mix likely to come from your super account, earnings on assets outside super and the Age Pension. The ASIC MoneySmart retirement planner gives you the option of including or excluding Age Pension entitlements.
5. Consider assets outside super
Earnings on any investment assets you hold outside super could be an important component in your retirement income, but not all super calculators give you the option to include these earnings.
Although younger savers may have limited assets outside super, older or wealthier super members often have non-super assets including term deposits, shares and investment properties. Taking into account investment earnings from non-super assets is important if you want a realistic picture of your likely retirement income.
The better calculators also allow you to include whether or not you are a homeowner, as having to pay rent will have a major impact on your retirement expenses.
6. Don’t forget fees and insurance premiums
The administration fees and insurance premiums paid from your super account can be a significant cost, so it’s worth checking the pre-set assumptions of the calculator you are considering. Often fees are assumed to remain constant over the projection period, while some calculators allow you to alter these fees within certain ranges.
Retirement calculators also usually assume you will pay a steady premium for the insurance cover provided by your super fund every year until retirement. A common default setting for insurance is the cost of basic cover for TPD and income protection for a member aged 40, but this may not reflect your personal circumstances. This cost may be too expensive for younger super fund members and too cheap for older members who face higher premiums as they age.
7. Consider spouse information
Not every retirement calculator automatically allows you to include information about your partner’s super and their planned retirement date. Many also assume both partners will retire at the same time, which often isn’t the case if they are different ages.
To gain an accurate picture, make sure the calculator you select allows you to enter detailed information for both partners.
8. Work out your retirement income budget
A good retirement budgeting tool can help you work out how much income you will need to live a comfortable lifestyle in retirement. Once you set a desired annual income level, the calculator uses this amount to work out how long your retirement savings will provide this level of income.
Some calculators offer tools that help you set a desired budget for different expenditure categories (such as energy and food), and then use this information to establish a desired annual income in retirement. The best ones also provide weekly or monthly comparison figures from the Association of Superannuation Funds of Australia (ASFA) that show the income required to live a pre-determined ‘comfortable’ lifestyle in retirement.
9. Consider your longevity risk
The best retirement calculators can also provide useful information on your chance of survival at different ages. For example, the projection will show your remaining retirement income at a particular age and that your average chance of still being alive then is 80%.
This information is based on the Australian Life Tables compiled by the Australian Government Actuary. It shows average lifespans from your current age so you can see how likely you are to outlive your super savings.
10. Trial scenarios and stress testing
Other interesting calculator tools allow you to trial different ‘what if’ scenarios. This means you can project what will happen to your retirement balance if you change variables like your retirement age or personal contributions.
Real financial nerds may want to try the calculators that allow you to ‘stress test’ your retirement savings in different investment scenarios. These types of simulators can show how up to ten different market scenarios would affect your retirement savings over time, with the projected retirement savings levels automatically adjusted.