Retirement Planner Assumptions

(Updated September 2016)


Purpose

Retirement Planner is designed to give you a sense of how much you can spend in retirement and how long your funds may last. Retirement Planner is a “stochastic simulation” meaning it aims to provide a probability of you meeting your retirement objectives. It is interactive allowing you to change assumptions to see how that affects your total investment assets and potential retirement income.

Retirement Planner is an educational tool but can be used when you talk to a financial planner. Retirement Planner can help you understand the long-term effects of savings and desired expenditure. It focuses on things you can control:

  • your retirement age and the impact of retiring sooner or later;
  • changing the income that you draw during retirement;
  • changing your investment mix;
  • implementing a savings strategy;
  • investments being held inside vs outside of superannuation; and
  • making extra contributions, either via regular salary sacrifice, or personal contributions either as regular or as a one-off lump sum

Retirement Planner cannot accurately predict your super balance or the effects of drawing an income from your retirement savings. This depends on a range of matters we cannot take into account, including (but not limited to):

  • Changes to your personal circumstances. Unexpected things happen in life such as taking time off work, relationship separation or poor health;
  • Unpredictable external factors beyond your control, such as changes to tax.

Retirement Planner tries to illustrate the effect of changes in some external factors. For example, it shows you how your projected retirement funds may fare in different investment markets, changes in income, Centrelink entitlements, and abilities to downsize your house or receive an inheritance.

While Retirement Planner is a useful starting point, it cannot replace expert, licensed financial advice and should not be used as the basis for any investment decision. But it is a good place to start and perhaps share with your financial planner. Retirement Planner allows you to store your data and share the outcomes with your financial planner.


How Retirement Planner Works

Retirement Planner will take various assumptions, apply Centrelink, superannuation rules, and tax code assumptions. Importantly, Retirement Planner does not assume investment returns are constant. Retirement Planner assumes a degree of return volatility.

Retirement Planner also assumes each year an investment return for one asset class will in some way relate to the likely returns for other asset classes. This is called correlation.

Age

Retirement Planner uses your age to calculate the amount of funds you can accumulate between now and your planned retirement age. We also use this date to calculate the maximum concessional superannuation contributions you can make, your preservation age and when you become entitled to the Age Pension.

We do ask for your gender, as future versions of Retirement Planner are likely to show life expectancy information.

Savings

For superannuation, Retirement Planner uses the current superannuation balance, your estimated future contributions (Superannuation Guarantee rate multiplied by your salary plus salary sacrifice plus non-concessional contributions.).

Your non-superannuation assets include your current savings plus the amount you nominate as additional non-superannuation savings.

How are you savings invested?

Retirement planner assumes all non-superannuation and superannuation savings and investment returns are invested in proportion to the users existing asset mix. For Premium users, the user can select a new asset mix that will apply for superannuation and non-superannuation investments.

The assumed rates of investment returns applied are shown in the Table 1 below. It is assumed that investment returns will fluctuate over the projection period including material corrections. The movement of prices will be statistically represented by the standard deviation for each asset


Table 1 Return and Risk Assumptions (real returns)
Investment option
Expected Index Return
Standard Deviation
Aust / Int Cash 1.50% 0.50%
Aust / Int Bonds 2.00% 3.50%
Aust / Int Property 4.75% 12.00%
Aust / Int Shares 5.75% 16.00%

Correlations between asset classes are in Table 2.

Long-term Estimates of Asset Correlations

Inflation Cash Bonds Property Shares
Australian Inflation 1.00        
Aust / Int Cash 0.20 1.00      
Aust / Int Bonds 0.10 0.30 1.00    
Aust / Int Property 0.00 -0.05 0.00 1.00  
Aust / Int Shares -0.10 -0.20 0.20 0.30 1.00

Tax Assumptions

Retirement planner makes assumptions about the portion of investment returns that are current income and long-term (LT) capital gains for tax purposes (i.e., all capital gains are assumed to be long term capital gains). The portions of taxable income and tax rates used are shown in the Table 2 below.

Table 2 Tax Assumptions

Portion of Return Split Between Current Income and LT Capital Gains Non-Super Tax Rates Super Tax Rates
  Current Income Capital Gains Current Income LT Capital Gains Current Income LT Capital Gains
Cash 100% 0% Marginal Tax Rate 50% of Marginal 15% 10%
Bonds 90% 10% Marginal Tax Rate 50% of Marginal 15% 10%
Property 50% 50% Rate Marginal 15% 10%
Shares 50% 50% Marginal Tax Rate 50% of Marginal 15% 10%

Using your current income

Retirement Planner uses the annual income you enter to calculate:

  1. Your employer’s compulsory super contributions. To do this, we multiply your Superannuation Guarantee (SG) by your “Current Salary”. The SG rate is assumed to start at 9.5% for the financial year ending 30 June 2016 and increase in line with current legislation. The maximum amount of SG is 9.5% times $203,204.
  2. The tax rate applied to any concessional superannuation contributions. Users with income above $300,000 have concessional superannuation contributions taxed at a higher 30% rate.
  3. Entitlements to age pension.
Desired Living Expense

This is the amount of money you would like to have each year to pay for your regular expenses during retirement including:

  • Regular living expenses
  • Car
  • Travel
  • Home maintenance

The Premium version allows the user to build up a more detailed version of expenditure including:

  • Regular living expense
  • Irregular expenditures on cars, holidays and other
  • Large one off payments

Some allowance can be made in the Premium version of Retirement Planner for fluctuations in desired living expense. For example, you might choose to draw a bigger income during your early retirement years by adjusting “Regular Other”, then draw a smaller income in the later years of retirement.

“Regular Other” can also be used if a user wanted to budget higher medical expenses in later years.

BigFuture assumes living expenses are met from potential income sources in the following order of priority:

  • Age pension (if you are entitled to age pension)
  • Minimum account based pension draw down (based on current legislation as shown below:
Age Annual payment as a % of account balance
55-64 4%
65-74 5%
75-79 6%
80-84 7%
85-89 9%
90-94 11%
95+ 14%
  • Non Superannuation Assets
  • Superannuation Assets

Savings outside of superannuation

Retirement Planner assumes all of your assets other than your house are financial assets and earn income in line with the Centrelink deeming rates. This income is then used in the calculation of any Centrelink benefits.

In applying the Centrelink Assets test, Retirement Planner applies the asset and income tests taper rates that will apply from 1 August 2015.

For age pension entitlements, Retirement Planner will assess if you are a couple and if you own a home. Retirement Planner makes these assumptions based on if you completed a partner component of Retirement Planner and if you stated that you have a “Residence” property in Wealth Tracker.

Retirement Age

Retirement Planner allows you to select the age you retire. At this age, Retirement Planner assumes you no longer earn any income.

The Premium version of Retirement Planner will allow some transition to retirement.

Graphs

There are two graphs displayed in the Retirement Planner output page. The top graph shows you the simulated path of your investment assets (super and non super) before and after retirement. This line excludes that value of your home.

Retirement Planner uses a simulation process to estimate how your investment assets could vary over time. The default chart shows the expected path of your assets as well as the 25% best and worst outcomes. Based on the simulation inputs, there is a one in four chance that your investment assets equal or exceed to best case (top line). Based on the simulation inputs, there is a one in four chance that your investment assets will equal or be less than the worst case (bottom line).

A drop down box will allow you to see even more varied outcomes.

The bottom graph shows you the sources of income that will contribute to your desired living expense. The default position shows the sources of income assuming your investment assets are as expected. The graph will show you your expected age pension, minimum account based pension from your superannuation, the returns or depletion of your non-superannuation assets and finally the returns or depletion of your superannuation assets.

You can select “Upper” or “Lower” to see how your living expenses are met if your investment assets are at the higher our lower band in the graph above (that is 25%, 10% or 5%)

Please note that if you select a retirement age past 65, Retirement Planner assumes you satisfy the work test to make contributions from age 65 to retirement.

Retirement Planner also assumes all contributions to superannuation do not exceed:

  • $30,000 concessional superannuation if you are younger than 49 or $35,000 if you are older than 49;
  • $540,000 of concessional and non-concessional contributions to your superannuation over a three-year period (and the Retirement Planner does not verify this).

Please note that when simulating strategies, Retirement Planner takes account existing government rules, which we update annually, and assumes that these apply throughout the projection period.

Today's dollars

You will notice that all figures in Retirement Planner are shown in today's dollars. This means that we have taken account of inflation. In reality, the rate of inflation will obviously change over time, so it is important that you consider and factor it into your personalised retirement calculations.

Advice

The figures shown are projections of your retirement savings. They are not estimates, predictions or guarantees. They are intended to provide a sense of how much you may need to retire and whether you are on track but they do not replace expert, accredited financial advice and should not be used as the basis for any investment decision.


General Assumptions
  1. The calculations in the simulator are valid for the 2017 financial year.
  2. No allowance has been made for potential changes in legislation.
  3. The simulator is appropriate for members of a taxed fund only.
  4. For the purposes of determining income tax, contribution limits and minimum and maximum pension withdrawal amounts, it is assumed that the projection is run on the first day of the year and that you are your current age for the entire year.
  5. All results displayed are in today's dollars.
Personal income
  1. “Current Salary” usually means your regular gross pay, but commissions or other allowances may need to be included depending on your own particular circumstances.
  2. No allowance is made for increases in salary due to productivity/performance.
  3. Income tax is calculated by applying personal income tax rates plus the Medicare Levy (but not the Medicare Levy Surcharge) to your projected taxable income in each projection year. The personal income tax rates used for the 2015/16 projection years onwards are the legislated tax rates for those years as at 1 July 2015. The temporary budget repair levy of 2% on the part of a person’s taxable income, which exceeds $180,000, is assumed to apply in future financial years.
  4. It is assumed you are an Australian resident for taxation purposes.
  5. In calculating the Medicare Levy, it is assumed individual income thresholds apply, and family income thresholds do not apply.
  6. The Medicare Levy is assumed to be 2% of taxable income for the 2016/17 tax-year and subsequent years.
  7. No allowance is made for the Mature Age Worker Tax Offset, the Low Income Tax Offset (LITO) or the Seniors and Pensioners Tax Offset (SAPTO).
Contributions
  1. Employer contributions include all concessional contributions made by your employer other than salary sacrifice contributions.
  2. The Super Guarantee rates assumed to apply in each year are as follows:
Year to 30 June
Superannuation guarantee rate
2016 - 2021 9.5%
2022 10%
2023 10.5%
2024 11%
2025 11.5%
2026 and thereafter 12.0%
  1. It is assumed your employer contributions are not affected by any salary sacrifice contributions.
  2. A warning is provided if you try to make more than the maximum concessional contributions permitted. You can ignore this warning.
  3. A warning is provided if you try to contribute more than your salary. This warning can be ignored.
  4. Allowance is made for the higher concessional contributions limit of $35,000 (not indexed) aged 50.
  5. Regular contributions and spending in retirement are assumed occur on the start of the year.
  6. Any lump sum contribution entered is assumed paid at the start of the projection.
  7. Concessional contributions are assumed to be subject to tax at 30% in the superannuation fund if your income including concessional contributions exceeds $300,000. Otherwise the tax is 15%.
Co-contributions
  1. No assumptions are made for co-contributions
Low Income Superannuation Contribution (LISC)
  1. No assumptions are made for LISC
Retirement
  1. It is assumed you will retire at the beginning of the financial year in which you reach your nominated retirement age.
  2. Retirement Planner will calculate if you have reached your preservation age and satisfy the condition of release.
  3. Any one-off lump sums required at retirement are assumed to be withdrawn at the start of the year in which retirement age is reached.
  4. If you intend to retire after age 65, we have assumed the work test is satisfied to make contributions.
  5. It is assumed you will commence an account-based pension with your superannuation savings balance at the time of full retirement.
  6. Pension withdrawals at the start of the year.
  7. Statutory minimum pension draw-down payment amounts are assumed to apply.
  8. Pension withdrawals after age 60 are assumed to be tax-free.
Centrelink
  1. Retirement Planner will calculate your entitlements for Age Pension based on age, income, assets, partners and house ownership. Retirement Planner assumes all other requirements to be entitled to Age Pension are met (for example citizenship, domicile)
  2. Retirement Planner assumes all assets outside your house are personal assets. The balance of these other assets is assumed to be financial assets and earn income in line with the Centrelink deeming rates. This income is then used in the calculation of any Centrelink benefits as well as being included in your income during retirement.
  3. The simulator estimates your Age Pension amount in each projected year and adds it to the projection.
What kind of personal information do we ask for?
  1. Because of the nature of retirement planning, government regulations and taxation laws, we ask you to input a range of personal information into Retirement Planner. This information is stored on BigFuture’s database.