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These days just about every super fund website has an online retirement calculator. The aim is to help you work out how much money you are likely to have in your super account when you retire, and how long your retirement savings are likely to last.
If the calculator’s figures look good, most people think their retirement plans will be just fine and don’t give it any more thought.
But before assuming your retirement income is taken care of, it’s worth understanding a little about how these retirement simulators work.
Why use a retirement calculator?
Projections of your likely retirement income can help fine-tune your plans for retirement, particularly as they make you think in terms of the income you will have to live on, rather than just the size of your account balance when you retire.
As the Australian Securities & Investments Commission (ASIC) commissioner Danielle Press said: “Superannuation calculators … can help consumers think ahead about what role their superannuation can play in their retirement income.”
The essential thing to understand when using an online calculator is retirement calculators are not a crystal ball; they’re 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 and income.
They can’t accurately predict the future, as they are limited by unknown factors such as your likely income from the Age Pension and other non-super sources, investment returns, inflation and the amounts you’ll want to withdraw from your super savings.
The government’s 2020 Retirement Income Review noted this point: “Because they offer long-term estimates, assumptions are critical to the effectiveness of both calculators and projections. To help typical people balance their current and future incomes, default assumptions must be reliable and neither overly conservative nor optimistic.”
Reasonable or not? Rules for super calculators
According to ASIC’s Regulatory Guide 167, super fund calculators must have a “reasonable basis for the assumptions” they use, but the regulator does not set specific rules for key variables like investment returns. Currently, the choice of variables is up to the individual 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 it can seriously mislead you about how much you need to save for retirement and how long it will last.
Default returns: Assumptions matter
When it comes to getting an accurate projection of your retirement balance, the assumptions used in an online calculator to create the final calculation of your retirement income 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.
Even on a straightforward investment option like cash, SuperGuide found one retail super fund assumed a default investment return of 3.2%, while an industry super fund’s retirement calculator assumed an investment return of 2.125% and a corporate fund assumed 4.3%.
There were also major differences when it came to growth investment options (70% growth and 30% defensive assets). SuperGuide found default investment return assumptions for these options ranged from 3.2% for a retail super fund through to 6.5% for a major industry fund and 7.5% in the calculator provided by 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 your final account balance is enormous.
Investment returns: Every year is different
Another common problem with retirement calculators is 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 calculated 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.
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.
Retirement calculators are 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 assume wages will grow at an annual rate of 3.5%. This is high given the ABS annual wage price index for Australia grew by just 2.2% in September 2021.
How to make a retirement calculator more useful
Remember, retirement calculators are just a model or illustration; they can’t 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 isn’t guaranteed. While they offer a useful starting point, you shouldn’t rely on retirement calculators alone 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 information or assumptions tab. If you don’t think the assumptions suit your personal situation, or your partner’s situation, or they are unrealistic – such as an investment return that’s too high – make sure you change them.