How accurate are ‘retirement estimates’? 7 assumptions you need to understand

Super forecasts can be a valuable tool for learning more about your likely account balance when you retire. They can also help you feel more connected to your retirement savings and can get you thinking about any changes you need to make to your super contributions or planned retirement date.

In fact, research has found fund members who are shown projections of their retirement balance, their retirement income or both in their annual statement say they intend to save significantly more than fund members who are only shown their current account balance.

According to ASIC, a superannuation forecast can be provided through an online super calculator, or as a retirement estimate on your fund statement.

• A retirement estimate is a projection provided by your fund in your statement showing your likely retirement account balance and income in retirement.

Retirement estimates don’t require you to enter any information yourself, as the trustee uses the data it has already collected about you (such as your current account balance, age, investment option and level of contributions).

• A superannuation calculator is an interactive online tool you can use to use to input certain assumptions to create your own retirement estimate. 

Calculators can also be used to check out the impact of making additional voluntary contributions or switching your investment option within the fund.

Both tools can provide useful insights when you’re planning your retirement. According to ASIC, retirement estimates are designed to provide “an accessible starting point for members to consider whether their superannuation is likely to provide them adequate income in retirement”. Calculators on the other hand, allow users to “explore how various factors or scenarios may affect their future retirement income”.

How accurate is your fund’s superannuation forecast?

Although the retirement forecast on your annual statement can be useful for getting an idea of how your retirement savings are tracking, the estimate is not a guarantee of how much you’ll get when you finally leave the workforce. It is simply a calculated guess based on a standardised formula.

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.

Your superannuation forecast: 7 things you need to know

When calculating your retirement estimate, your super fund is required to follow a standard formula set by ASIC. This is to ensure all super funds calculate their forecasts using similar rules and assumptions.

ASIC released new regulations covering retirement estimates and online calculators in July 2022. The rules require the assumptions used to create your retirement estimate or calculator result to be ‘reasonable’ for users who are likely to be using a super calculator or receiving a retirement estimate.

Under the July 2022 rules, ASIC requires your super fund to use the following assumptions when it calculates your superannuation forecast:

1. Your investment returns are based on reasonable assumptions, not what you actually receive

Under ASIC’s rules, trustees are permitted to set their own default assumptions for investment earnings, fees and costs. These assumptions must be ‘reasonable’ given the investment option you are currently invested in and must include all relevant fees and costs such as direct and indirect investment fees and administration fees.

This means the retirement forecasts and calculator results provided by various super funds are likely to be different – even if they are based on the same account balance or investment option. If you use several calculators, you need to be aware they may not be comparing apples with apples.

2. Inflation will be at a set rate

ASIC requires superannuation forecasts to be adjusted for inflation and provided in today’s dollars.

A 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.

Currently, trustees are required to use a default annual inflation rate of 4% per year if you are still saving for retirement and an annual inflation rate of 2.5% per year if you are retired and drawing down on your super account.

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. If you are 67 or older, the default assumption is you will retire on your next birthday.

Your retirement estimate also assumes your drawdown period will end at the later of when you reach age 92, or five years after you start drawing down on your super. The annual income stream in retirement is also assumed to be constant from year to year over the drawdown period and when it ends your account balance is zero.

Although these assumptions may be nothing like what you have planned for your retirement, ASIC believes using a standard retirement age provides 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 superannuation forecast is based on the current contributions received into your super account, less contribution taxes and inward rollovers. Fund trustees are required to assume your contribution levels will change in line with wage inflation and the legislated changes to the Superannuation Guarantee (SG) rate.

If you receive a pay increase and your employer is required to make higher SG contributions on your behalf, or you choose to only work part time in the years before retirement (and therefore have lower SG contributions), or you make a large one-off contribution in a particular year, these changes will affect the accuracy of your retirement estimate.

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 between the date it 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 savings 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 entitlements in your retirement forecast.

If your super fund decides to include an estimate of your likely Age Pension payments, ASIC requires it to make some default assumptions that may or may not apply to you. These include:

• When you reach Age Pension age you qualify for an Age Pension
• You have a partner
• You and your partner jointly own your own home
• You and your partner each have a single super fund benefit equal to the estimated lump sum amount for the member
• 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 default assumptions don’t reflect your personal situation, the superannuation 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, although this also has limitations. Retirement calculators also use assumptions, only some of which can be customised to reflect your personal situation.

Another alternative is to seek professional advice from an independent financial adviser. They can help you create a more personalised estimate of your retirement balance and income by including factors like your non-super assets and income, planned retirement expenditure and personal circumstances.