How to use the TelstraSuper Lifetime Income Calculator

Welcome to our demonstration of TelstraSuper’s Lifetime Income Calculator. This is a very novel tool, and as far as we’re aware, at SuperGuide, it’s the first for the industry. This tool does something that TelstraSuper refers to as Modelling Income Layering. What they mean by that is that you would draw your retirement income from both an account-based pension and also a lifetime pension.

And you can see the difference that that would make in comparison to simply using an account-based pension for all of your superannuation. This can have impacts not only on how long your superannuation will last. Of course, any lifetime pension portion is guaranteed to last you for life, but also can have impacts on your eligibility for Age Pension because a lifetime product is assessed differently in Centrelink’s means tests. And this calculator can take all of that into account. Let’s dive in and have a look.

You can see, first of all, you just need to enter your basic details, your gender, because that affects your life expectancy and how a lifetime pension will work. You also need to indicate whether you’re retiring this year. I’m going to put in that I’m female and say, No, I’m not retiring this year.

You can see now that it pops up this warning to say, Let’s assume you are retiring this year. Because this calculator is really designed to model the outcome for you if you’re just about to start this lifetime pension. Of course, if you’re not, you can still use the tool. It still gives you a lot of valuable information about your options, but it’s probably something that you should come back and use again or seek some personalised advice when you actually do retire and want to start your pension. That’s because the life expectancy tables move from year to year, and that will change the outcomes that are modelled from a tool like this.

So we’ll say we expect to retire at age 68 and put in a superannuation balance of $400,000. Now we can continue using this lifetime income simulator. I’m going to put in that we also have a partner who is a similar age and also has the same balance in superannuation. It might look like I’m putting some big numbers in here, and that’s true, I am. These are large superannuation balances. However, the reason I’m doing that is to show you the impact it can have on Age Pension eligibility. The more assets you have, generally the lower Age Pension you receive, and the more impact then using a lifetime pension can have on the Age Pension that you do get, because not all of your lifetime pension will be counted in that Assets Test by Centrelink.

You can see here we can also edit our Age Pension details, so I’ll click that and show you. If you want to here, this actually brings up all the assumptions, and we can scroll down to the Government Age Pension section to put in your assets, any investment property you have, and other income, so that the tool can model your Age Pension entitlement more accurately. We’ll come back and look at more of these assumptions later, but for now, I’ll go back to the tool.

By default, the tool will model using 35% of your superannuation to start a lifetime pension. So I will leave it at that for now, but you can change it. And the remaining balance of your superannuation will be invested in a growth investment option in an account-based pension. It puts in here an estimate of your income needs. This is based on the ASFA Retirement Standard for a couple, but you can edit this. So you can put in your own income goal, or you can click here to personalise your spending needs, and it brings up this budget budgeting tool, and you can put in your own expenses. You can also put in any separate lifestyle goals that you have here, such as renovations, purchasing a car, regular holidays, and so on that are outside of your standard income needs.

First of all, let’s just have a look at the default output of the calculator. So you can see here it’s showing us that the income projected, if you just use an account-based pension is this figure, $70,591 per year, and it’s higher if you put 35% of your super into a lifetime pension. Part of the reason for that is this higher Age Pension. So you can see the tool here is comparing 100% account-based pension on this side or 0% lifetime pension, however you’d like to put it, and comparing that with if you do to put that percentage of your super in a lifetime pension. So it’s comparing the first scenario to the second in this table and showing you the variance in each type of income by following that strategy.

If we continue to scroll down here, you can also see that it’s modelling a Moderate investment option for the account-based pension in the first scenario and a Growth option in the second scenario. But it’s got a very similar graph here for growth versus defensive investments. And that’s because it’s considering that all of the 35% of your super balance you’ve put into a lifetime pension is a defensive investment, a secure investment, if you like. That money, according to the default assumptions of the calculator, will pay you an income for life that is indexed to inflation, no matter what investment markets do. So that is, of course, a defensive investment, and that’s why these graphs look similar.

You can change your investment options, though. So for example, if you said, well, actually, I would invest in Balanced if I put all of my superannuation in an account-based pension, and I would put my account-based pension money in high growth if I had the security of knowing that that other proportion of my balance was going to pay me an income for life. I’d feel more secure to put my account-based pension in High growth, for example. So you can change those there and see how that impacts your outcomes.

What I’d also like to do here is show you that you can change how much of your super you want to invest in the lifetime pension. So let’s say we actually wanted to go 50/50, put half our money in the lifetime product and half in a standard account-based pension, and we’d like to see the difference there. So it’s changed the model here slightly to show you the outcome of that.

The other interesting thing that we can do here is see the income through the years. So if you click this Income tab, you can see this colourful graph that shows you where all your income is coming from. The government Age Pension is this bottom bar. This is your lifetime pension, your partner’s lifetime pension, pension, your account-based pension, and then your partner’s account-based pension. You can actually look at that on a year-on-year basis.

This calculator, like TelstraSuper’s other retirement projector, is also a stochastic calculator. So for the portion of your money that’s invested in an account-based pension, it’s generating a thousand possibilities for the series of investment returns that that account may generate based on the investment option you’ve chosen. And it’s then giving you a probability on the first page of your income meeting your requirements. So it’s a probability-based calculator, which is nice to see.

You can also view your changing balance here. So there are four tabs here: your super account-based pension, your partner’s account-based pension, and then here are your lifetime pensions in orange. So traditionally, the older style lifetime pensions didn’t have a withdrawal value. Once you purchased a lifetime pension, that was it. If you were unlucky enough to die within, say, the first five years, there was no remaining balance to be paid out, and that was one large drawback of lifetime pensions.

The more modern lifetime pensions are much less commonly like that. There usually is the option to make a withdrawal if your circumstances change, and there usually is a death benefit, at least at first, if you’re to pass away within the first few years of your account commencing. Of course, you need to read all of the products disclosure and understand how the exact product you’re investing in will work.

The product that TelstraSuper is modelling is, unsurprisingly, their own lifetime pension, which is offered through the fund. So that’s what you’re looking at here when it’s showing you how your withdrawal balance is going to change. You can see once you reach your life expectancy, there’s no longer any option to withdraw any money from the lifetime pension, although it will continue to pay you an income on this Income tab for life.

I’d like to bring you back to the main calculator to tell you more about the stochastic nature of the tool. You can see right at the top here, it’s saying in both scenarios, we’re 99% likely to achieve the income goals. That’s what I mean when I say it’s a probability-based calculator. It’s not very informative telling us we’re 99% likely. Let me change some of the figures here to show what can happen if we don’t have as much superannuation. It’s recalculating here, and it should be less likely that we’ll reach the income goal. You can see here, those both changed now. It says we’re only 23% likely to achieve income goals if we put 50% of our super in a lifetime pension. Now, that might make you think a lifetime pension is a terrible idea, but really it depends how you look at it. It’s saying, well, you’re not going to achieve the level of income that you’re aiming for because we’ve still told it we want $70,000 per year, and we’re not going to reach that level of income.

However, we will have more certainty that the income we do receive will last for life, certainly the portion that we’ve put into the lifetime pension. So if we look at the Income tab, you can see in the lifetime scenario, which is what we’re modelling, putting 50% of our super in a lifetime pension, you can see the blue, the dark blue of the account-based pension runs out quite early, but the level of income that we continue to maintain is still above $50,000 per year for life. And that’s through the combination of the Age Pension and the money that we’ve put in the lifetime pension. So although you wouldn’t be as likely to achieve your target income requirement, you would have the certainty that once your account-based pension did run out, you’d still have a liveable income for the rest of your life from that lifetime portion. So it’s important to keep that in context.

But it’s very nice that it does show you these probabilities rather than just a hard and fast projection that a lot of calculated tools do. You can also adjust your goals here. So if you look at this and think, I’m very frightened by only having a 50% likelihood of reaching my income goals, You might go down here and say, Well, actually, I don’t need $70,000 a year as a couple to live on. We have very modest requirements, and we could make do with $60,000 per year. Remember, this is tax-free money, so it’s not like earning a salary of $60,000. It’s $60,000 after tax, in your hand. So with that change being made, you can see now the picture is far rosier. We’re now 98% likely to achieve that goal and 95% likely if we put half the super in a lifetime pension.

Now, the other thing that’s important to know is that if you don’t touch the assumptions, this calculator is going to model what will happen if you have a lifetime pension that’s indexed to inflation. So each year, the level of income that you’re paid will just go up in line with CPI to keep pace with the cost of living, which is certainly a very popular way of doing things. However, if you’re more interested in having a lifetime pension that is exposed more to investment markets and can fluctuate with the markets and perhaps generate you a higher level of income when the markets are doing well, then you can model that, too. So if we go down here to the assumptions, we can view and change those assumptions.

You can also say you’d like it to be very highly likely that your money lasts you the time that you’ve projected and at the level of income that you want. So you can move that if you want to. I have 90% likelihood instead of 80%. I’m just going to to leave that. But here in the lifetime pension details, you can see that you can select instead to have a market-linked pension. So let’s do that.

A market-linked pension, instead of being indexed to CPI every year, would be indexed to the change in an index that’s modelled based on a different portfolio of investments. So you can see by default here, it selects Conservative Balanced, which is 50% growth assets and 50% defensive assets. And then if that portfolio grows in value in one year, then in the subsequent year, your income from your lifetime pension will go up. If the return from that portfolio is negative, then the amount of income you receive from your pension in the following year will be lower than it was the year before. So it fluctuates more in line with the return of that portfolio, but could potentially achieve you a better average income over the years than just having your income indexed to inflation. So it’s worth having a look if you’re comfortable with that to see what impact that might have.

I’d also like to show you the other assumptions that the calculator uses. So if you continue to scroll down, you can see that you can edit the Administration fees to reflect what you’re really paying. There’s also a range of assumptions that you can’t edit, but that might be of interest to you. If you’d like to see those, you can click these Other assumptions and disclaimers to see much more detail about how the calculator works.

For example, if you look at these lifetime pension-related assumptions, you can see how it’s modelling the Asset Allocation, if you choose a market-linked lifetime pension like we’ve just done in the assumptions on the other page. So it shows you here the Asset Allocation and also the indexation that it’s modelling. So for that market-linked Conservative Balanced option that we chose, it’s going to model an annual return that will have a mean of 6.83%, which means the average return. But that return will deviate by quite a lot. It shows you the standard deviation there of 8.45%, reflecting that that investment return is quite variable. And you can compare that with the CPI, that it’s modelling as an average of 2.55%, and that it will vary by that standard deviation of 2.25%. So if you’re wanting to see more about the maths of how the calculator works, that’s where it is. And it also shows you, of course, all these other limitations, how your life expectancy numbers work, and so on. So if you’re the kind that wants to delve into those, that’s where you can find them.

So I hope that our demonstration of this calculator has been useful to you, and perhaps will lead you to think more about whether a lifetime pension could form part of your retirement income strategy.