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When you open your annual member statement, many super fund members see a comforting estimate of how much their account balance is likely to be when they retire, and how much income it will provide in retirement.
But assuming your super fund knows everything about you and your retirement plans is a big mistake.
Retirement estimates aren’t a definite prediction of your future; they’re just an educated guess based on some standardised rules. So, just what is your fund’s retirement estimate based on and how accurate is it?
Why do super funds provide a retirement estimate?
A retirement estimate is a projection provided by your super fund in your annual statement showing your likely retirement account balance and income in retirement.
Retirement estimates don’t require you to enter any information yourself, as the fund trustee uses the data it has already collected about you (such as your current account balance, age, investment option and level of contributions).
The government’s 2020 Retirement Income Review noted retirement projections can be very helpful for members. “Projections or estimates of a person’s retirement income, which focus on future income streams rather than lump sums, can help people plan for their retirement. Specifically, they may help people to think about superannuation in terms of income, rather than an asset.”
Studies have found these types of projections help increase your interest in your super. In fact, an Australian research paper in 2020 noted fund members who were shown projections of their retirement balance, their retirement income, or both in their annual statement, indicated they would choose to save significantly more than members who were only shown their current account balance.
Your super fund trustee also hopes seeing a printed retirement projection on your annual statement will encourage you to use the fund’s online calculator to check out the impact of making additional voluntary contributions or switching your investment option within the fund.
How accurate is your fund’s retirement forecast?
Although the retirement estimate on your annual statement can be useful for getting an idea of how your retirement savings are tracking, the forecast is not a guarantee of how much you’ll get when you finally leave the workforce.
The amount you actually receive is likely to be very different, so it’s worth understanding how your fund calculates the estimate of your final account balance and projected retirement income.
When calculating your retirement estimate, your super fund is required to follow a standard formula set by the financial services regulator ASIC in its Regulatory Guide 229 (RG229). This is to ensure all super funds calculate their forecasts using similar rules and assumptions.
In late 2021, ASIC began a consultation process with the super industry on proposed changes to its guidance on retirement estimates, including the requirements of RG229. Under the new rules, fund trustees will not be required to use an assumed rate of investment earnings set by ASIC (see below), but will be able to use ‘reasonable’ default assumptions. These assumptions must be clearly and prominently disclosed to members.
ASIC expects to release its new regulations on retirement income estimates in April 2022.
Your retirement estimate: 7 things you need to know
Currently, ASIC requires your super fund to use the following assumptions when it calculates your retirement estimate:
1. Your investment returns are the same, whatever your investment option
Under ASIC’s formula in RG229, your super account will receive a standard investment return of 3% per year (after inflation) – regardless of the investment option you have selected. This earnings rate is after tax and investment fees.
ASIC set a standardised real investment return to ensure years with high or low investment returns do not affect the estimated result and mislead you about how much you’re likely to receive at retirement.
For most of us, a retirement estimate based on an annual 3% real investment return is unlikely to be what we actually earn, as returns for asset classes like shares or bonds are never the same and different investment options have different returns.
In 2020–21, for example, the median one-year investment return for the high growth investment option in a super fund was 22.4%, while the median one-year return for the conservative investment option was 7.9% (both returns are after investment fees and tax, but before administration, adviser commissions and inflation).
2. Inflation will be at a set rate
Currently, ASIC requires retirement estimates on your annual statement to be adjusted for inflation and to be provided in today’s dollars.
The default inflation rate is set by ASIC and reflects changes in the cost of community living standards. This rate is reviewed and set in June each year.
Under the proposed rules, trustees will be required to use a default annual inflation rate of 4% if you are still saving for retirement and an annual inflation rate of 2.5% if you are retired.
3. You will retire at 67
ASIC’s formula assumes you’ll 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 will help you get a consistent picture of how adequate your estimated annual retirement income will be.
4. Your super contributions remain the same over your working life
Your retirement estimate is based on the contributions received into your super 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 therefore 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.
Under the proposed rules, trustees will need to assume your contribution levels will change in line with wage inflation and the legislated changes to the SG rate.
5. Tax and super rules won’t change before you retire
In calculating your retirement estimate, your super fund is required to assume the current taxation rules and other legal factors governing the super system are not going to change.
Your retirement estimate assumes these rules will remain unchanged between the date your super fund calculates your retirement balance and the date you retire.
6. Your savings outside super aren’t included
Your retirement estimate does not include any investment assets or savings you and your partner have outside super, such as an investment property, shares or term deposits. It also ignores any other account balances you or your partner have in other super funds.
If you have significant investment assets or several super accounts, your retirement estimate could be much lower than the total amount you actually have saved for your retirement.
7. Age Pension income assumptions
Some super funds include Age Pension payments in their estimate of your annual retirement income, based on the current eligibility rules.
If your super fund decides to include an estimate of your likely Age Pension payments, ASIC requires it to make assumptions that may or may not apply to you. These include that:
- 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 any Age Pension payments you are entitled to receive.
Standard assumptions not applicable to you?
If ASIC’s assumptions don’t reflect your personal situation, the retirement estimate calculated by your super fund is unlikely to be 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.
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