Nearly all large superannuation funds offer a tool for calculating future retirement balance adequacy and income. However the range of underlying assumptions utilised mean that this projected measure of adequacy for a member's retirement income varies dramatically between fund calculators.
While superannuation funds increase their on-line customized member engagement and financial advice, a simple retirement calculator to estimate both projected accumulated balance and consequent retirement income adequacy is still provided as a first step for members to use directly.
An outline of the key features of calculators and the range of application of these features across the largest 20 not-for-profit (NFP) and Retail superannuation funds is shown in Table 1.
For the largest 10 NFP funds by size, nine had an open customised retirement calculator available. For the next tier of funds, approximately 50% had a bespoke retirement calculation tool, while the remaining half referred to the ASIC MoneySmart website or provided no tool at all.
Most of the large retail groups offering super funds had a customised retirement calculator. The newer technology promoting superannuation products, such as GrowSuper and Spaceship, have embedded their calculator into their member app rather than providing it openly through their website.
Funds typically make use of some market standard data. This includes data from the Australian Bureau of Statistics mortality rate assumptions, ASFA retirement standard, core inflation and wage inflation assumptions, and the legislated future increases in the superannuation guarantee rate.
In regards to insurance premium cost, around half of funds do not include an annual cost for insurance in their calculation of expected superannuation balance accumulation. This is despite the fact that many of these funds make their insurance default opt-out for members.
While there are a multitude of varying assumptions in the calculators, the one that has the greatest impact on both the retirement balance and the projected retirement income is net investment return. The range of forecast annual investment returns is surprisingly wide ranging from 3.8% pa up to 7.3% pa, adjusted for net of tax and fees. See Figure 1.
The default assumption for returns in most cases was the assumed long term net return within the relevant MySuper product. A number of funds alternatively use the assumed default return rate within the ASIC MoneySmart calculator, which is at the lower end of the market range. There is the added functionality provided by some funds to incorporate a lifecycle sequencing of investment returns in years approaching retirement.
The consequent projected retirement balance for a base case with all other input assumptions held steady is shown in Figure 2. The funds with the highest net investment return projected retirement balances of over twice the level of funds with the lower assumed net returns.
The impact of investment returns does not stop at the default age of 67 when a member moves to retirement. In fact the variation in net investment returns is greater in the retirement phase of the calculator than in the accumulation phase. This in turn has a dramatic impact on annual income in retirement, even with the interaction with the government aged pension.
Importantly in the overwhelming majority of cases users can change investment return assumptions. They can change by percentage increments or they can change to another diversified option within the fund that yields a different return. The tools also provide mechanisms for members to see the impact of their own actions such raising contributions, changing retirement age or moving to part time work.
In conclusion, the retirement calculators provided by superannuation funds are robust and put into the hands of members functionality to project returns, assess adequacy and understand impact of altering actions and options.
However the absolute variation in projected outcomes from the calculators reflects the reality of the deep impact of higher compounding returns for members. And with each fund typically using their MySuper default option target return as the underlying assumption, these calculators do in some ways reflect the benefit of choosing the right fund and the right option.
So just like the reality - choose a fund with good default return and take what direct action you can to increase you balance along the way.