How accurate is your ‘retirement estimate’? 7 assumptions you need to understand

When opening their annual member statement, many super fund members see a comforting projection of how much their account balance is likely to be when they retire, and how much income it will provide in retirement.

According to super industry researcher SuperRatings, 42% of super funds now provide retirement projections in their member statements, up from only 34% in 2017.

But what are these retirement projections based on and how accurate are they?

Why do super funds provide a retirement estimate?

Your super fund provides a retirement estimate to help you work out how you’re tracking when it comes to your likely retirement income. The fund also hopes seeing these figures will encourage you to use its online calculator to check out the impact of making additional voluntary contributions or switching your investment option.

In fact, research by the Centre of Excellence in Population Ageing Research found that simply seeing a retirement income forecast had a marked impact on the behaviour of super fund members.

If you are provided with an estimate of how much income you will have in retirement, you are 33% more likely to make additional savings or change your investment option selection.

For more about online calculators, read SuperGuide articles How reliable are retirement income calculators? and How to select a retirement income calculator.

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 you’re going when it comes to your retirement savings, the forecast is not a guarantee of how much you’ll get when you finally decide to leave the workforce.

The amount you actually receive is likely to be very different, so it’s worth understanding how your fund calculates their 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 financial services regulator ASIC in Regulatory Guide 229. This is to ensure all super funds calculate their forecasts using similar rules and assumptions.

Your retirement estimate: 7 things you need to know

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, your super account will receive a standard investment return of 3% per year (after taking into account 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 2018/2019 for example, the one-year investment return for the high growth investment option in a super fund was 7.4%, while the one-year return for the conservative investment option was 5.6% (both returns are after investment fees and tax, but before administration and adviser commissions).

For more on investment options and the variation in investment returns, see the following SuperGuide articles:

• Super fund performance over 28 financial years (to June 2020)
• Super fund performance over 27 calendar years (to December 2019)
• Super investing: Should you change your investment option?
• Super investing: How to change your investment option

2. Inflation will be at a set rate

From December 2019, ASIC requires all retirement estimates (both on your annual statement and in an online calculator) to be adjusted for inflation.

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.

Super funds can use a different inflation rate using a different inflation assumption, but this must be clearly disclosed.

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 likely annual income will be in retirement. 

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. For more on SG contributions, see SuperGuide article Superannuation Guarantee rules for employers.

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 decide you want to 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 your super account, 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.

For more on planning your retirement, see the following SuperGuide articles:

• How to plan for your retirement
• When should I retire?
• How much super do I need to retire?

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 for the Age Pension.

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 are not accurate for 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.

For more on retirement calculators, see the following SuperGuide articles:

• How reliable are retirement income calculators?
• How to select a retirement income calculator