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Calculating retirement - a Citro guide

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Letter from the Citro editor

Online tools and technology have changed the way we think about everything from banking to investing and, inevitably, our retirement and superannuation. Each of us is only one Google search away from finding an online tool that seems to magically calculate everything retirement in one magical push of the button. Some calculators sell themselves as wealth calculators or income planners. Others are life expectancy calculators or longevity calculators.  

Yet each calculator hides a labyrinth of assumptions - as well as disclaimers like ‘for illustrative purposes only’ - that  keep the topic of retirement income planning more complex and confusing than it needs to be. Citro asked financial educator Nicole Pedersen-McKinnon to dive into 5 popular online calculators to explain the good, the bad and what could be better. We wanted to keep this guide simple, so we excluded calculators from superannuation funds or banks. 

This wasn’t because super funds don’t have good calculators - many do - but Citro was trying to keep to the basics. As always, we know we can do better, so I’d love to hear your thoughts on this guide and how we can improve the next edition.  I welcome your emails at alex@joincitro.com.au or connect with me on LinkedIn. We’re always striving to make Citro the best destination it can be to support every Australian to make their best years better.

Warmest,

Financial educator Nicole Pedersen-McKinnon explains what you need to know about 5 popular online retirement calculators - and how to punch the numbers into them wisely.

Nicole Pedersen-McKinnon is a finance educator and author who has written expert stories for Citro, including Understanding how retirement income works, How private health insurance saved my life and How to stay fit and healthy for a fraction of the price.

By Nicole Pedersen-McKinnon
Advice given in this report is general in nature and is not intended to influence readers’ decisions about investing or financial products. People should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

What’s in this Citro guide?

Free retirement income calculators available online can help you plan to save, invest or splurge. We had an expert review some of the biggest freely available retirement calculators in Australia and give her Plain English verdict on what they mean and whether they can be helpful.

1. How much will you need to retire?

Understand the ASFA retirement standard calculation. Super Consumers Australia offer a different version - it's worth calculating your own spending needs and coming up with an annual income figure you think works for your needs.

Read Nicole's verdict on the ASFA retirement standard.

2. Calculating the lump sum you need in your super before you retire

Read Nicole's verdict on the Moneysmart lump sum calculator.

3. Retirement income planning calculators

Read Nicole's verdict on the Moneysmart retirement income planning calculator.

4. Other retirement calculators

Read Nicole's verdict on the Moneysmart retirement income planning calculator.

5. Comparison website retirement calculators

Read Nicole's verdict on the Canstar and Finder retirement calculators.

6. Superannuation jargon explained

Read the guide to some of the terminology and confusing words that plague us when trying to understand how to plan and calculate our retirement in Australia.

How much will you need before you can retire?

Everyone has different means, goals and dreams around retirement. What’s right for one person isn’t right for another.

When you no longer earn a full-time salary from work, you’ll want to understand how much money you have, and the free calculators available across the internet are as good a place to start as any.

The $64,000 question – whether or not it has a $1million luxury solution – is: how much money will you have at retirement?

Financial experts argue over how much is enough to retire on, the answer will come down to your annual spending needs … and wants.

A great gauge is the Retirement Standard issued each quarter by the Association of Superannuation Funds of Australia (ASFA).

It calculates the cost of living over a year, in detailed categories, for both a modest and a comfortable retirement. 

Because people tend to spend more when they first retire – hello European vacations – and less later, it also estimates the income requirements after age 85.

Australia's retirement income system tends to take what's known as a 'glide down' approach, where you spend both your capital and interest from investments inside and outside of superannuation to fund the years when you no longer work full-time.

Delaying the age you retire can help you reduce the savings needed.

ASFA's suggested retirement incomes - assumes you own your own home

Most people would want to aspire to be in the 'comfortable' category, but ASFA's helpful detailed budget breakdowns also reveal how much you should spend on categories like utilities, food and other essentials.

Comfortable lifestyle income per annum for people 65-84

  • Couple, $71, 723.56

Superannuation balance required by age 67 to achieve this comfortable lifestyle income is $690,000 (combined) assuming you draw down all capital and receive a part Age Pensionn. These figures also assume you own your own home.

  • Single, $50,981.27

Superannuation balance required by age 67 is $595,000 assuming you draw down all capital and receive a part Age Pension. These figures also assume you own your own home.

Comfortable lifestyle income per annum for people aged around 85

  • Couple, $65,554.96
  • Single, $47,338.04

Modest lifestyle income per annum for people 65-84

  • Couple, $46,620.05

Superannuation balance required by age 67 to achieve this comfortable lifestyle income is $100,000 assuming you draw down all capital and receive a part Age Pension. These figures also assume you own your own home.

  • Single, $32,417.48

Superannuation balance required by age 67 is $100,000 assuming you draw down all capital and receive a part Age Pension. These figures also assume you own your own home.

Modest lifestyle income per annum for people aged around 85

  • Couple, $42,978.78
  • Single, $30,034.80

SOURCE: Association of Superannuation Funds of Australia, September 2023 - check ASFA for the latest and most up to date figures

Super Consumers Australia suggested retirement incomes

Super Consumers Australia’s Retirement Savings Targets are an independent tool to help people start to work out how much they need to save for retirement. Like ASFA, these targets assume you own your own home and crunch retirement savings goals that are based on:

  • Your age,
  • Whether you are single or in a couple, and
  • Whether you have low, medium or high fortnightly or annual spending goals.

Singles who own their own home with low retirement spending goals

  • Will spend $1385 a fortnight - or $36,000 a year
  • They will need $91,000 in lump sum superannuation by the time they are 65

Singles who own their own home with medium retirement spending goals

  • Will spend $1808 a fortnight - or $47,000 a year
  • They will need $317,000 saved in lump sum superannuation by the time they are 65

Singles who own their own home with high retirement spending goals

  • Will spend $2269 a fortnight - or $59,000 a year
  • They will need $777,000 saved in lump sum superannuation by the time they are 65

Couples who own their own home with low retirement spending goals

  • Will spend $2000 a fortnight - or $52,000 a year
  • They will need $116,000 combined saved in lump sum superannuation by the time they are 65

Couples who own their own home with medium retirement spending goals

  • Will spend $2654 a fortnight - or $69,000 a year
  • They will need $425,000 combined saved in lump sum superannuation by the time they are 65

Couples who own their own home with high retirement spending goals

  • Will spend $3346 a fortnight - or $87,000 a year
  • They will need $1,037,000 combined saved in lump sum superannuation by the time they are 65

So what about people who don't own a home when they retire?

This is becoming increasingly common as housing affordability problems escalate. Some research estimates as many as 90% of people believe they will have to use their superannuation to pay down their mortgage at retirement.

"The typical low income renter needs to save about double what their home-owning peers require to maintain an equivalent standard of living in retirement, and for many people that level of saving is impossible," says Rebekah Sarkoezy, Policy Manager, Super Consumers Australia.

"Instead, Super Consumers Australia emphasises that it's the responsibility of the government to step up and resolve housing affordability issues."

Superannuation goals by age 67 and the ASFA standards

Most people's preservation age to access superannuation and turn it into retirement income will be 60, but 67 is the age when Australians are eligible to apply for the Age Pension.

If your income wants and desires line up perfectly with ASFA’s estimates of what you will spend across all the facets of your life, happy days: you can just use the cookie-cutter number it has pre-crunched.

Though it’s one-size fits all, the good thing about this number is that the assumptions behind it are clearly disclosed.

Firstly, you must tick the boxes of 3 variables when you retire at age 67:

1. You own your own home by retirement and so have no accommodation costs.

2. You drawdown all your capital over the course of your retirement.

3. You receive some Age Pension both immediately and, a growing amount because of No. 2, into the future.

On top of these personal factors, we know the calculations are in today’s dollars using 2.75% average weekly earnings as a deflator – this is just supposed to remove the effect of inflation – and assume an investment return of 6%.

Note, as the association explains on its site: “In March 2023, ASFA revised the modest and comfortable lump sums needed to reflect the high rate of inflation, and that there has been no real increase in the Age Pension as price growth has been greater than the increase in average wages.” 

So, what is today’s lovely, comfy-in-retirement lump sum, according to ASFA?

Under its assumptions, you don’t need that daunting $1 million that is often bandied casually about, but just $595,000 for a single and $690,000 for a couple.  

Nicole Pedersen-McKinnon's verdict on ASFA’s Retirement Standard lump sum calculation?

It’s a sensible number and the spending standards it aims to satisfy are an important adjunct to the actual super calculators that are out there.

Resources for further reading to help work out how much you will need in retirement include:

Lump sum superannuation calculators

Your super lump sum is an easy way to think about the ‘pot’ of superannuation money you will have when you want to retire. Then you can use the Australian Government’s Moneysmart lump sum calculator.

Moneysmart.gov.au’s super lump sum calculator has some serious cred behind it, powered as it is by the financial regulator ASIC’s financial capability site, moneysmart.com.au.

And it is extremely powerful.

The calculator allows you to input a significant number of variables so highly tailor the result… to both you and your fund.

The metrics that tailor the calculation to you are: 

  • your age, 
  • desired retirement age, 
  • income, 
  • current super balance, 
  • superannuation guarantee contributions, 
  • and whether and how you pay in additional money.

Note that moneysmart.com.au calculators are – commendably – not just clever enough to adjust up your employer and extra contributions for inflation, but also adjust down your contributions if they would exceed the (concessional or non-concessional) contributions caps.

The metrics that tailor the calculation to your fund are your investment returns, tax on earnings and investment fees.

You can also input the fund fees: contribution fee, admin fees and indirect cost ratio.

Beneath the result also lies assumed 2.5% annual inflation and a further 1.5% each year due to the cost of rising community living standards.

But you can alter both in “advanced” settings, along with a default annual insurance premium of $214, also increasing with inflation each year.

Nicole Pedersen-McKinnon's verdict on the Moneysmart super lump sum calculator?

This is an excellent, highly accurate calculator. But if you don’t know all the information it allows you to input, which you may well not, the default settings – or underlying assumptions – are vital.

Don’t manually input any numbers and ASIC’s calculator will assume a default fund with a 0% contribution fee (common), a $74 per annum admin fee (low for high balances) and an indirect cost ratio of $0 (ideal).

The 7% tax on earnings is fairly standard but an 0.85% investment fee errs on low too.

On top of this, and curiously for a government calculator, the investment assumptions are less conservative than ASFA’s above.

True, this reflects the fact you might decide to take on more investment risk when you are working and accumulating super – the phase this calculator is concerned with – than you will on the flip, pension side of life, which is where ASFA’s calculator sits (remember, ASFA’s assumption is 6%).

But ASIC’s assumed return of 7.5% – coupled with low assumed fees – would skew your estimated balance at retirement to the high side if markets are volatile and/or annualised returns more subdued.

So, although these assumptions are based on Treasury’s long-term retirement income models, be sure to consider your actual super fund’s outlook.

How high are the fees and is the assumed ongoing return reasonable based on past performance, as well as achievable into the future? (Of course, if they are not, you should probably switch to a better fund.)

Moneysmart's superannuation calculator is powerful to help you work out the 'lump sum goal' you should strive to reach before you retire.

Retirement income planning calculators

Difference between lump sums and income streams

How you turn your pot of superannuation money into an income stream comes down to your personal preferences, tax implications and how you like to budget and spend.  The moneysmart.gov.au retirement planner income calculator turns a particular superannuation lump sum into potential income – so it picks up from where the last tool left off.

You don’t need to enter nearly as many personal parameters in moneysmart.gov.au’s retirement planner calculator as this is straight maths, and the assumptions underlying the result are, once again, transparent. 

The fine print says: “As of 8 February 2023, the results are now adjusted for future increases in cost of living by deflating projected values back to today’s dollar value. The wage inflation assumption is used for the period up to retirement and the CPI inflation assumption for the period in retirement.”

The built-in inflation assumptions are detailed and disclosed – for instance, the identical-to-before 2.5% a year but wage inflation of 4% each year.

You can change these too in the “advanced” settings, as well as the defaults for fees, insurance and investment returns, as above. And, as above, you may well need to alter the last three. (The 7.5% pre-retirement investment return compares with 6.5% post-retirement, slightly higher than ASFA’s assumed 6%.)

But you can, usefully, also play with how many years you want a given level of income to last.

Of course, along with needing to know how long it will go for, there is the question of how far it will stretch.

Remember, for that, we already have ASFA’s guide for the annual spending that a stereotypical ‘comfy’ couple will incur, that $70,806 a year for couples and $50,207 for singles. Read ASFA’s detailed breakdown if you want to know more.  

Then there is another set of retirement income estimates that feature prominently on moneysmart.gov.au based on low, medium and high spending, produced by Super Consumers Australia.

These help people aged 55-59 and 65-69 forecast and target their retirement needs. The estimates, as with ASFA’s, are predicated on you owning your own home and therefore having no housing costs. These retirement targets also factor in any age pension for which you might be eligible.

They put ASFA’s comfortable retirement spending estimates about mid-way between medium and high spending.

Or you can get really simple about it and use as your guide an old back-of-the-envelope trick: you will need two-thirds of your pre-retirement income.

So, regardless of the income it tells you for which you are long-term-on-target, what’s the verdict on the retirement planner calculator?

Nicole’s verdict on moneysmart.gov.au retirement planner income calculator

My verdict on the moneysmart.com.au retirement planner calculator: This is quite a complex but helpful calculator to see how far your projected lump sum could take you and completes the loop with ASIC’s super lump sum forecaster. 

Being really picky, because this tool is again just so comprehensive on so many aspects of retirement, note that you can’t vary your contributions or, say, add a lump sum like an inheritance to see how far your super will swell (I don’t know of any tool that lets you do that). 

Note that you can factor in the impact of a career break. This is a rare and important functionality for people to forecast the impact of gaps in their paid work, perhaps to care for children or parents.

And the incorporation of the Age Pension and your self-funded income into the one income calculation is impressive and oh-so-useful.

 

The Moneysmart retirement planner calculator shows you how your income breaks down between income from superannuation and Aged Pension.

Overall, this calculator (combined with the ASFA and Super Consumers Australia spending projections) gives a decent idea of the particular retiring lump sum that will snare you the particular retirement lifestyle you want … and for how long.  

Retirement specialist and author Noel Whittaker’s calculators

Respected personal finance author and super specialist Noel Whittaker offers multiple free calculators on his website: you have the super lump sum estimator, the super contributions calculator, the retirement drawdown calculator and an age pension calculator.

Where relevant, the default settings have not been updated for the July 1 increase to superannuation guarantee contributions, to 11.5% – but that’s just an oversight and easily overridden. 

However, the suggested annual super return is 8% and even 9%, which is more optimistic than the above calculators and perhaps not as realistic once in the pension phase and/or if you tilt your investment mix (also known as asset allocation) to be more conservative – so less risky.

But you can change it – you might opt to use the 7.5% ASIC favours in accumulation phase (relevant for the lump sum and contributions calculators) and the 6% ASFA uses in pension phase (for the drawdown calculator).   

Less straightforward is just what assumptions underpin some of the calculations, in terms of inflation and cost of living adjustments. With the exception of the lump sum generator and drawdown calculator, where you can set inflation yourself, there is no information about this disclosed – but we will get back to that.

The lump sum estimator and the contributions calculator esentially split up the functions of moneysmart’s super calculator, with the personal variables similarly under your control (and sufficient). 

Nicole’s verdict on Noel Whittaker’s retirement calculators

Plugging your numbers into these calculators is an interesting exercise, but they are simpler than moneysmart.gov.au’s alternatives so the results of each exist in isolation, without taking into account other factors like the potential for Age Pension payments.

This could have a big impact.

That there is little information disclosed about the assumptions underlying some of them – and presumably no adjustments made for fund fees, insurance costs and tax on earnings – also makes the results less achievable in real life. (Don’t put commas in numbers – it breaks the calculator.)

What of the dedicated Age Pension calculator? There are few such calculators – and decent ones – around, so this is instructive. Having said that, it is not official and as such should not be the sole basis for your retirement spending planning.

Respected author and retirement specialist Noel Whittaker's calculators can be an interesting exercise, but the assumptions underpinning them aren't as clear as the Moneysmart calculators.

Comparison site retirement calculators

Nicole’s verdict on Canstar and Finder retirement calculators

There are nearly as many comparison websites as there are retirement calculators online, so Nicole Pedersen-McKinnon reviewed 2 of Australia’s largest sites - Finder and Canstar - to deliver her verdict.

Various financial comparison websites offer calculators that forecast super retirement balances and/or income. Two are worth mentioning.

The Canstar superannuation and retirement calculator is highly visual, easy to use and though you cannot alter them, the clearly disclosed assumptions are sensible.

Though there is no mention of fund insurance premiums, super fund fees are a reasonable estimate of 1% and total inflation is 4% (2.5% plus 1.5% p.a. additional rise in living standards), like ASIC’s moneysmart.gov.au. Annual salary will increase at the same rate as the consumer price index.

However, here, the rate of investment return during the accumulation phase is a conservative, hard-coded 7% (it matches ASFA’s 6% in draw-down phase).

And doesn’t this make the difference to the figures.

This calculator also shows you the scary projected retirement shortfall, if applicable.

Incomes for the basic, modest and comfortable lifestyle levels are based on the Age Pension and ASFA Retirement Standard… and they are significantly out of date.

As opposed to the $70,806 a year it requires for a couple to live comfortably, and the $50,207 for someone who is single, the figures it uses are $66,725 and $47,383.

Which makes the subdued results this calculator generates even more sobering, although it is unclear whether it has been updated for the rise in superannuation guarantee contributions to 11%.

Canstar's retirement calculator uses out of date retirement income assumptions.

Finder offers an alternative, nicely visual (except for questionable cartoons of elderly people) and simple-to-use end-balance calculator.

But on the Finder superannuation calculator, you can vary both the investment return and the fees.  

Other underlying assumptions (inflation and insurance premiums among them) are logical and can be altered, too.

But as with Canstar, there is no talk of tax on earnings so we can assume this is not factored into the results… and indeed, the forecast balance comes out slightly higher than moneysmart.gov.au’s comparable calculator.   

Superannuation and retirement jargon explained 

Most of us know that superannuation is the government-mandated retirement scheme that ensures our employers put away a percentage of our salary for us to enjoy when we retire.

Many of us aren’t as sure about the other confusing terms that go along with it. Here’s a quick explainer.

Superannuation: an Australian Government scheme to help people fund their own retirement so they don’t have to rely solely on the aged pension. Read more about the 3 phases of superannuation on Citro.

Superannuation Guarantee (SG): Australian laws mean employers must put away 11% in Superannuation Contribution Guarantees for each eligible employee. This is legislated to rise in half per cent increments each year until it reaches 12% of wages in 2025.

Accumulating superannuation: This is the time during which you build your super, usually while working full or part-time before your retire. From 1 July 2024, employers must put away 11.5% in Superannuation Contribution Guarantees for each eligible employee.

De-accumulating superannuation: This is what happens after you officially ‘retire’ and you draw down your superannuation to live on. Read 11 ways to make your retirement income last as long as you do on Citro.

Super lump sum: Once you enter the de-accumulation phase of superannuation, some funds allow you to withdraw a lump sum. If you take a lump sum, the tax office no longer considers this as ‘super’ and you may need to declare it in your tax return. 

Super income stream: For most people, an income stream from their super will be tax-free from age 60, but this isn’t always the case. There are also different types of super income streams, including:

Account-based pension: regular payments from your superannuation pot of money.

Age Pension: the government payment older Australians are eligible to receive if they meet assets, income and residency requirements. Read more about the Age Pension on Citro, and how Peak Pension works.

Annuity: a fixed income for a set period of time or the rest of your life. Read more about annuities on Citro.

Types of superannuation funds: You may have heard of different types of superannuation funds, like ‘industry funds’, ‘private funds’ or even ‘self-managed super funds (SMSF)’. Essentially superannuation funds are tax-sheltered ways for people to accumulate and de-accumulate their money at different phases of their life. 

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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