Mercer’s Retirement income simulator is a notch above many other projection tools. Among its features, the simulator can model the outcome of variable investment returns.
Most calculators assume you earn the same, stable return year after year. We know this doesn’t reflect reality. A calculator that includes the real-life variability of returns allows you to stress test your results and see how a negative return at the wrong time can put a spanner in the works.
Another helpful feature is the ability to enter the amount you can afford to contribute to super each year, and have the calculator work out the optimal mix of salary sacrifice and after-tax contributions for you.
The simulator also has myriad options that can be tailored to your situation. You can model career breaks, lump sum withdrawals, one-off contributions, you and your partner retiring at different times, and include your assets outside super for more accurate modelling of your Age Pension entitlements.
Using a simulator like this can be overwhelming at first, so we have put together a video tutorial to help you make the most of it.
Welcome to our demonstration of the Mercer Retirement income simulator. This calculator is incredibly useful and very versatile. But because there are so many options, it can be quite overwhelming to use. We hope that this walkthrough will demystify it for you and allow you to use the tool to help you with your retirement planning.
When you first visit the Retirement income simulator, it will take you first through a tutorial. I’ve skipped that step just for simplicity. But when you visit on your own, we do suggest that you have a look through that tutorial to get to grips with the calculator before you come through to this page.
This is the first welcome page that you’ll see once you start using the tool. It has default figures in here for age, salary and super balance because I didn’t go through the tutorial. But if you have, it will be pre-populated with your real age, your salary and your super balance that you put in during that tutorial section. I’m just going to change this to make the person a little bit older. Perhaps they’re 55, say No, they’re not already retired. I’ll leave the salary amount the same and make the super balance a little bit higher to reflect that they’re older and have had more time to accumulate super. I’m going to leave this person as the male partner and then you just click Next.
So it is a step by step tool. You can work through the steps in order. That’s the best way to use it. If you make a mistake, you can always go back. So I’ll show you, here is the Menu. So we’re up to the Your contributions section and that’s what it says now. It’s going to ask us next about career, our spouse or partner and so on. So if you make a mistake, you can always just click here and go back to the section that you want to revisit and make changes.
Here you can choose if you’re self employed. If you say yes, it will remove your employer super contributions. I’m just going to leave it as No. Then you can put in your employer super contribution amount. It’s set by default to 11%, which is the required minimum. But if your employer pays more, you can use the slider to change that. Or you can just click on the figure and type in the new number. That can be a little bit easier than using the slider.
The next part here is where it asks you about your voluntary super contributions. For now, I’m going to leave that blank, but we’ll revisit it later. It also asks here if we expect to make a one off super contribution. For now, I’ll also leave that as No. But if your plans are that you will, you can go ahead and put that in.
This next step is about career changes. So this is where the flexibility of the calculator really starts to come into its own. You can insert up to three career changes and three career breaks. That could be for anything from taking care of elderly relatives to taking care of your own small children or even just taking a sabbatical. You can put those in here.
For simplicity I’m not going to actually insert any of those into the calculator because it does complicate the results more. But I’ll show you how it works. If you want to select a career change, you can say the age that you’re planning to change career and what your salary will be after the change, so that the Calculator can take that into account. But I’m going to leave it as zero as I said. With career breaks, it’s similar. You can say the age that you’re going to take the break and how long it’s going to be for. So it’s quite simple to use.
But let’s just press next. Now move on to our spouse or partner. So I said the first partner was male. Let’s assume the other is female. That’s most common. It’s got the age here of 40. I put in that the male was 55. So perhaps we’ll say that his spouse is 50, she’s five years younger than him, that wouldn’t be uncommon. Her salary, we’ll leave it at $50,000. And her current super balance, again, perhaps a little more because she’s had some more years to accumulate super. Then we can press Next. Again, the partner is not self employed and is not making any contributions to super at the moment and has no career changes planned.
Here’s where we put in our details for the age pension. So we select, Yes, most people are eligible for age pension, and this is where inserting your other assets and income is really important, because the calculator will use those to inform how much age pension you’re likely to be eligible for.
The first part here is about homeownership. So in this situation with a couple who are 55 and 50, we would expect that probably they’re still repaying their home loan. So we can put in here a home loan balance. Maybe they still owe $300,000. Perhaps the interest rate is 6%. They have gone up lately and then monthly repayments might be $2,230 say, that’s fine.
You can put in any other investment assets that you have outside super, like shares, managed funds, even money in the bank. And then your other assets is things like your car and your home contents. What you need to put into that box is the fire sale value of those things. So for age pension purposes, Centrelink don’t want to know what it would cost you to replace your cars and your lounge and all your other furniture. They want to know what you would receive if you needed to sell it quickly to get emergency money. So that’s the number that you’re putting in here. Let’s say our fire sale value of our two cars and all our furniture is $50,000. And we don’t have any other investment assets that we’ve accumulated at all. Then we can press next again.
Now, this is where the calculator gets really interesting because you can see this warning box has popped up here that says you’ll be paying your home loan into retirement. And there it’s talking to me. So it’s assuming I plan to retire at 67, my partner will be 62 because they’re five years younger and the home loan is still going to be outstanding. So this is a really helpful warning. You can click here to see more. And it shows us we’re still going to owe $125,000 on that mortgage at retirement and suggests we could perhaps use a lump sum at retirement to pay off the remainder of that mortgage and clear that out of the way. And the calculator will prompt us when we get to that step to put in that figure.
So I’ll continue on and show you that. Here, too, actually, we can say that the spouses retire at different times, so I will do that because they’ve got an age gap. Perhaps the younger partner also wants to work until 67 and the calculator can do that. Or if they want to work to an entirely different age, you can move this slider and change that. And again, we hit Next.
So here’s where we get to the lump sum withdrawal information and it’s popping us up this warning again, that our home loan is still going to be $125,000 when we retire. So we can say, okay, we’re going to take a lump sum withdrawal at 67 of that figure. I’ll just make it $126,000 just for roundness, and we’ll take that out. So you can see now that the graph has changed in a dynamic way because this is showing us our income year by year. And now it’s put in that big lump sum withdrawal from the first partner’s super. So the graph looks a little bit different, but that’s just because it’s squashing everything down to make this big bar fit on the page. Again, we can press Next.
And here it’s going to ask us about our investment option. So you can put in the kind of strategy that your super is currently in, and what you plan to invest in after retirement. This calculator assumes that you’re going to use your superannuation balance to open an account based pension, which is the most common type of superannuation pension, that will provide you with retirement income. Of course, it’s also assuming we’re going to withdraw that lump sum that we’ve told it to, to pay off the mortgage.
This is where the tool starts to get really interesting, and I’ll show you what I mean. It’s set down, first of all, as a lifecycle option. Let’s change that to, let’s say, a growth option before retirement. And then we can set a different investment strategy after retirement if we like. So, again, you can see how many options and variables there are in this tool. We’ll change it to perhaps a moderate growth option after retirement, which is a bit more conservative.
I’m not saying that these are the options that you should choose. This is just for illustration’s sake. If you’re not sure what option you should choose, there’s actually a quiz here that you can do for your investment risk attitude to work out what kind of mix of assets might be most suitable for you. So you can go ahead and do that if you’re not sure what to pick.
Now that we’ve chosen our investment options, it’s built those investment returns into our outcome. But without doing anything else, it’s going to assume that we earn 8% every year, year in and year out while we’re still working, until we hit retirement age. And then after retirement age, when we’re in pension, we’ll earn 7.3% per year.
Now we all know that that’s not realistic. Your super account doesn’t earn 8% every single year. If you’re invested in a growth oriented investment option, some years it earns 15%, some years it earns two, and some years it’s a negative return. So to make the calculation more realistic, Mercer have put in what they call a stress test. So I’m going to move on to the next step here and show you that stress test.
By default it’s disabled, so you can turn it on by pressing enabled. And now what the simulator will do is it’s got ten different scenarios of possible patterns of investment returns that could occur with the different investment options. It’s not what they call stochastic calculator, which would build in a true randomness. It’s just ten different scenarios. But it’s certainly better than nothing. It’s better than assuming you’re going to receive a steady return every year because we know that that’s not realistic.
You can see the simulated returns here at the bottom of the page and you can actually look at each one individually if you want to, to see what they are. When you press refresh, the pattern of returns changes and you can see the graph changes in response. So even though you’re receiving the same average return over time, the pattern of those returns and the sequence is very important for your retirement outcome. And by continuing to click this refresh button you can walk through all ten scenarios to stress test your result and see how that’s going to impact your retirement outcome.
What we can see here as well is that the desired retirement income set by the calculator by default is $50,000. Now for a couple that’s probably not going to be enough. Most sort of standards that would express how much you need would indicate that a couple would need more like $75,000 per year for a comfortable lifestyle. Or you may like to estimate based off your pre-retirement income. A lot of sources say you may need say, 70% of your pre retirement income, assuming that you own a home at retirement.
So you can move this desired retirement income just by moving this line up and down. So if we say, well, actually we’d like more like $75,000 a year, you can see that the graph moves in response to that. And it’s got us withdrawing more from our superannuation in those early years to bring us up to that living standard. That’s the target.
Again, we can keep going through these returns. You can see that one’s looking significantly healthier because of the pattern of returns. This one’s not so good. That one’s even worse. And they keep sort of varying like that.
So I’m just going to pick this one. And we can now look at some of these other tabs. So by default, the calculator is showing you your results by income. But a lot of people would prefer to see how their balance in super might change. So you can click on that and see here’s my super balance.
It’s about here at retirement age. And then it’s going to go down, down. You can look at the home loan. So here’s the repayments while we’re working. And then that lump sum payment at retirement. And at the very beginning is this summary that shows you your current situation, what retirement looks like and what beyond retirement looks like. So it’s saying our super is going to last until we’re 105, and there’s only a 1% chance that we’ll outlive our super.
So if we go back to this Income tab and again, change our desired retirement income, because perhaps we want to be more ambitious and aim a little bit higher, be more comfortable in retirement. Let’s say we want more like $94,000 per annum, that’s going to mean that our money is actually predicted to run out at the age of around 86. And after that, we’re just going to be living on age pension.
OK, so if this is the output of your calculator, you might think, oh, well, what can I do to try and fill this gap and get my desired retirement income? And this is where you can use the scenarios tool. So let’s do that. Now, if you come to this very top, click on Scenarios and then press Compare Scenarios.
So you can say this first one is my do nothing position. I’m not currently contributing to super. I’m not going to start. This is what’s going to happen if I do nothing. Our new second scenario can be our what if. What if we started making contributions to super? What if we worked longer? Those will affect our outcome, of course. So you can see it’s a little confusing at first because this drop down says stress test on it because that’s the last thing we were looking at. But if you click this again, you can go back and change all the details for your new scenario.
So let’s say we’re going to put some money into super this time. What I’d like to show you here is a very interesting feature of the calculator where it can calculate your contributions for you. If you press this Allocate automatically button, you can tell the tool how much you can afford to contribute. So let’s say this individual can afford $500 a month from their after-tax income. But they don’t know how much that converts to as a salary sacrifice amount, or whether they should make any of that contribution after tax.
So you can just put into the calculator okay, I’ve got $6,000 a year, that’s $500 a month that I want to contribute to super and it will say OK, well to do that you can actually salary sacrifice $9,160 because you would earn that amount before tax to get $6,000 in your pocket to take home. So if you salary sacrifice that you’ll only be out of pocket $6,000 per annum.
So it’s really handy that it does that calculation for you. If the person had a lower salary it would suggest that they make some after tax contributions in order to get a government co-contribution so it’s got that built-in as well. On the other hand, if a person had a much higher salary and was close to the contribution limit already based on their employer contributions, it would set to the maximum their salary sacrificer and recommend any extra go in after tax so that they don’t breach the contribution limit. So that’s very handy.
Well, we can still say No, we don’t expect to make a one off super contribution, still no career breaks. Our partner still has the same salary and super balance but they’re going to make some contributions too. Unfortunately on the partner side it doesn’t have that Allocate automatically option for the contributions. Although you could go back to your details, change your salary to be your partners and use the tool there to get it to work it out for you and then come and put the output over here. So it’s a little bit fiddly but it is possible.
Let’s say our partner is intending to put in some salary sacrifice as well. Perhaps they’re going to do 5% of their income. And they don’t expect to make a one off super contribution because we don’t have any assets to do that with. No career changes. We’re going to still allow for age pension with the same mortgage and the same repayments.
Now here’s where we can make more changes. Perhaps we’ve decided we’re also happy to work a bit longer. So let’s say we work until 70 instead, both of us. And you can see here, this is the old scenario in the red dots and then our new scenario is the colours on top. So you can see that the super is lasting longer in this new scenario because we’re making some contributions. Now it says our home loan at age 70 is only $58,000.
So because we’ve worked longer and continued paying that mortgage for longer, the balance that we need to pay off at retirement is less. And that means we don’t need to withdraw as much from our super to pay that off. So we can change this withdrawal amount down to I’ll do it by typing again because that’s easier. Let’s say $59,000, that’s going to be enough to repay that mortgage and then hit Next.
So here you can see we’ve made a significant difference. This is the old scenario in red and the new one we have our super lasting significantly longer because of that lower lump sum withdrawal and also because of working longer. We’ve got the same investment options and we’ve got the same pattern of returns. So you can actually look at this box here and it shows you your saved scenario, which is the first one versus the new one. So you can see in the old scenario we had no contributions, now we’ve got $6,000. Our spouse wasn’t contributing, now they are. We’ve changed our retirement ages and we’ve changed our lump sum withdrawal. So it shows you there what you’ve changed.
Now when you get to this point, I’ll show you one more thing on the previous screen. Here is where you can in the investment section change the fees of your product. So have a look at your super product disclosure statement and grab the fee structure and you can put that in here to reflect the real fees that you’re paying. You can also change the inflation rates should you wish to.
Once you’ve done all of that and you’ve finished using the calculator, you might want to go back and look some more at the comparison between the old scenario in red and your new scenario. Your balance, again, you can see. So this is your new scenario. You’ve got a much bigger balance lasting a lot longer. Your income is what you were looking at. And the summary now has this new tab called Compare. So you can see if you make the changes of changing your voluntary contribution, increasing your spouse’s salary sacrifice, increasing your retirement ages and making a different lump sum withdrawal, you could retire with $340,000 more, your super could last eight years longer and the risk of outliving your super could decrease by 38%. So that’s really informative, to tell you the impact of making those small changes that could have on your final retirement outcome.
Once you’ve finished using the calculator, you can actually save your results. So you can press this button here that says Save PDF and it will allow you to download a document to your computer that shows you all of the information that you input and what the output was along with all the assumptions and disclaimers that are built into the calculator that are really important to read. Now initially it looks like you need to put your email address in here to get it emailed to you. You can do that if you’d prefer not to disclose your email address to people, you can just click this button that says Direct Download and I’ll show you what happens.
There we go. Took a little while, but that has popped up there. So you can see there is my statement and I can save that on my computer and look at that whenever I want to. Can even print it out, show it to other family members, your partner and so on to help you plan.
Just going to close that so we can see our calculator again. There’s also a survey here at the end. Do take the time to fill that out. If you’ve used the calculator, it gives Mercer some really helpful feedback about how it works and what could be improved. And you can revisit it as many times as you like if your plans change. If you decide that you are going to put a lump sum contribution into super, for example, maybe you can downsize your home or do something else that’s going to free up money. You can come back and revisit it as many times as you like.
It does automatically save your results for you. So when you come back, it’s already got all your scenarios in there. But if you’d like to start from the beginning, you can. You just press this view button and then you can click Restart and it’ll refresh everything. So you can start from the very beginning. Model someone else’s situation, if you like, instead of your own. Help a friend use it.
So we hope that this walkthrough has been helpful to you. To show you how this Mercer Retirement income simulator works and how to get the most of it, so that you can use it to help you plan for your own retirement. Thank you.