Money

Plan for retirement – how it works

Published on November 7, 2016 10:11 pm, by

Planning for retirement can be difficult. There is a bewildering array of superannuation options and rules to consider and that’s before trying to figure out how much money you need to support your retirement plans.

MoneyBrilliant’s Plan for Retirement feature helps you estimate the value of your retirement savings. In the simplest case you can just connect your Super accounts, enter details about how your super is invested, the contributions you plan to make and when you plan to retire. We’ll do the rest by projecting this forward and estimating how much you’ll save. We’ll use reasonable assumptions to create the estimate for you, but you can change these if you want to fine tune the estimate.

When we calculate your estimated retirement savings we’ll also apply all of the rules and regulations about how super works. We’ve summarised the key ones below to help you understand what’s going on behind the scenes.

Remember, the estimate we provide you is just that – an estimate. It’s not a prediction and it doesn’t take into account your personal circumstances or objectives. If you want help you should consider seeking advice from a licensed financial adviser. If you are making decision about your superannuation fund you should read and consider the information in the Product Disclosure Statement (PDS) fro your fund.

Your gender
Your gender influences your estimated life expectancy, with women generally living a little longer than men. We estimate your life expectancy based on standard life expectancy tables available from the Australian Bureau of Statistics. But you can change this too, so if you want to live longer than average, or you feel like you days are numbered, go ahead and change the estimated life expectancy.

Your date of birth
Your date of birth drives a number of aspects of the Plan for Retirement calculations. First it influences your default retirement age. We set your default retirement age based on superannuation regulations that set your ‘preservation age’ which is the age at which you can usually access your superannuation savings. Preservation age is gradually being increased so the younger you are the older your default retirement age will be. But of course you can decide to retire at any age – you just probably won’t be able to access your super until you reach your preservation age. So if you plan to retire early, or you want to work longer and save more in super go ahead and adjust your retirement age.

Your date of birth also influences your estimated life expectancy. Generally the younger you are the longer your life expectancy as health and medical science increase how long we can expect to live. We estimate your life expectancy based on standard life expectancy tables available from the Australian Bureau of Statistics. But you can change this too, so if you want to live longer than average, or you feel like you days are numbered, go ahead and change the estimated life expectancy.

Your retirement age
We default your Retirement Age to your superannuation preservation age – which is usually the age at which you are allowed to access your superannuation savings. Preservation age is gradually being increased so the younger you are the older your default retirement age will be. But of course you can decide to retire at any age – you just probably won’t be able to access your super until you reach your preservation age. So if you plan to retire early, or you want to work longer and save more in super go ahead and adjust your retirement age.

Your life expectancy
Your life expectancy is important so you have an understanding of how long your retirement savings will need to last. We estimate your life expectancy based on standard life expectancy tables available from the Australian Bureau of Statistics. But you can change this too, so if you want to live longer than average, or you feel like you days are numbered, go ahead and change the estimated life expectancy.

Your Gross Annual Salary (including employer superannuation payments)
Your Gross Annual Salary is used to calculate part of your superannuation contributions. Your employer or superannuation guarantee contributions.

We calculate your future Gross Salary using the Salary Annual Growth rate. By default we assume this is 2.5% per year (the same as the default assumption for inflation) but you can change it if you want to.

We will also use your Gross Annual Salary to estimate whether you are likely to be entitled to relevant superannuation benefits (such as Government Superannuation Co-contributions and the Low Income Superannuation Tax Offset) or subject to other superannuation regulations such as Division 293 tax for high income earners.

Employer Contribution
Most employees receive a mandatory superannuation contribution from their employer. The contribution is based on salary. By default the Employer Contribution is 9.5% of gross salary but you can change it if you receive a different amount. You might receive a different amount if you have agreed a different amount with your employer. If you are self employed your Employer Contributions will generally be zero and all your contributions will be voluntary contributions.

Employer contributions are expected to rise to 10% in the 2021/22 financial year, 10.5% in 2022/23, 11.0% in 2023/24, 11.5% in 2024/25 and 12.0% in 2025/26.

We assume employer contributions are paid into your superannuation fund quarterly (and so investment earnings compound on a quarterly basis)

Main Super Account
Your main super account is the account we assume you continue to receive contributions into. The main Super Account you select has no impact on your retirement savings calculation. The Super Investment option and Fees and Charges included as assumptions or entered by you do impact your retirement savings calculation. These assumptions are independent of the Main Super Account you select.

Super Investment Option
Your Super Investment Option is how the majority of your superannuation is invested. You can select from a number of standard investment options that have been pre-configured with reasonable investment returns, taxation rates and fees and charges. You can also select the Custom option to enter your own Investment Return, effective tax rate and fees.

We assume Investment returns on the standard Investment options are credited to your superannuation fund on a quarterly basis (and so Investment returns compound quarterly. In calculating Investment returns we use the Investment return net of effective tax and investment fees and charges.

Custom Investment options
If you select the Custom investment option you will be required to enter your own annual Investment Return, effective tax rate and investment fees. If you select a Custom investment option we will use the information you provide to calculate your estimated retirement savings.

We assume Investment returns on any Custom Investment options are credited to your superannuation fund on a quarterly basis (and so Investment returns compound quarterly. In calculating Investment returns we use the Investment return net of effective tax and investment fees and charges.

Contributions
In addition to your employer or superannuation guarantee contributions you can specify additional contributions you plan to make to super. These additional contributions can be made before tax (sometimes known as concessional contributions because of the concessional taxation on these contributions) or after tax (sometimes known as non-concessional contributions because these contributions don’t get taxed at concessional rates).

You can also specify the amount of the contribution (in dollars) and the frequency of the contributions. Contributions can be made with a number of different frequencies or they can be once off contributions made at an age you specify.

Superannuation contributions are subject to various caps. Caps are set for both concessional and non-concessional contributions. Ordinarily, if you make contributions in excess of the caps you can either have the excess contribution refunded or you can pay additional tax on the excess contributions. For the purpose of estimating your retirement savings we assume that any contributions you make in excess of the caps are refunded to you.

We assume voluntary contributions are paid Quarterly or at the end of the quarter in which they occur. Any one off contributions are assumed to have been paid at the end of the financial year in which you reach the age specified for the one off contribution.

Any Contribution fees payable on Contributions are assumed to have been paid at the time of the contribution.

Salary Annual Growth Rate
The Salary Annual Growth Rate is used to project increases in your Gross Salary from now through to your Retirement Age. As your Salary increases the employer or superannuation guarantee contributions we estimate will also increase. By default we set your Salary Annual Growth Rate to the default Inflation Rate. But you can change this if you want to.

The Salary Annual Growth Rate is used to estimate future Gross Salary and to increase regular voluntary contributions.

Inflation Rate

The Inflation Rate is the estimated rate of inflation, or growth in prices, from now through to your Retirement Age. We use the Inflation Rate to estimate increases in some of the fees and charges we estimate. We also use the Inflation Rate to calculate the Present Value, or value in today’s dollars, of your Retirement Savings. This is an estimate of what the future purchasing power of your retirement savings will be. By default we set the Inflation Rate to 2.5% which is within the target range for Inflation set by the Reserve Bank.

The Inflation rate is used to estimate increases in flat Administration Fees, Insurance Fees and Adviser Fees.

Contribution fees
In some superannuation funds you will be charged a contribution fee on the contributions you make to the fund. These fees are generally set as a percentage of the amount contributed. By default we assume your fund does not charge a contribution fee. If your fund does charge a contribution fee you will need to adjust this assumption. Any contribution fee you set will be deducted from any contributions we calculate when estimating your retirement savings.

Any contribution fees payable are assumed to to be paid at the time of the contribution.

Yearly admin fees – dollars
Most superannuation funds will charge an administration fee to cover the costs of providing their services. By default we set the Yearly Admin fees to what we believe is a reasonable estimate of what you are likely be paying. You can change the amount we set by default to any other amount you wish or to the amount your specific fund charges you. You can set a Yearly Admin fee in dollars or percentage terms, or a combination of both.

We assume that Yearly Admin Fees are paid from your superannuation fund at the end of each year. We also assume that any dollar based Yearly Admin fees increase in the future at the rate of inflation.

Yearly admin fees – percentage
Most superannuation funds will charge an administration fee to cover the costs of providing their services. By default we set the Yearly Admin fees to what we believe is a reasonable estimate of what you are likely be paying. You can change the amount we set by default to any other amount you wish or to the amount your specific fund charges you. You can set a Yearly Admin fee in dollars or percentage terms, or a combination of both.

We assume that Yearly Admin Fees are paid from your superannuation fund at the end of each year. We also assume that any percentage based Yearly Admin fees are paid on the average balance of your superannuation fund for the year. We do not increase percentage based Yearly Admin fees with inflation.

Yearly Insurance Premium
Many people pay for life insurance and/or income protection insurance from their superannuation balance. This can sometimes be a more cost effective way of paying for insurance. However, the insurance premiums are deducted from your superannuation balance and will reduce your retirement savings.

By default we set the Yearly Insurance Premiums to zero. If you do pay for insurance from your superannuation fund you should enter the amount you pay in insurance premiums so we can take this into account in estimating your retirement savings.

We assume that any Yearly Insurance Premiums you set increase at the rate of inflation in future years.

Yearly Adviser Fees
Sometimes people pay their financial adviser from their superannuation fund or they pay an adviser service fee. By default we assume your Yearly Adviser Fee is zero. If you do pay advice fees or an Adviser Service fee from your superannuation fund you should update this assumption so we can take it into account in estimating your retirement savings.

We assume that any Yearly Adviser Fees you set increase at the rate of inflation in future years.

 

This summary has been prepared by MoneyBrilliant Pty Ltd (AFSL 492711, ACL 493068). The information in this summary is of a factual nature only. We are not suggesting or recommending that you take any particular course of action in relation to any financial product or service. It does not take into account your personal circumstances or objectives. If you need financial advice you should seek advice from a licensed financial adviser.

Share now

Peter is the CEO of MoneyBrilliant. He has over 20 years experience in banking, insurance and accounting. Peter has three sons, ranging in age from 16 to 3, is a sport and fitness fanatic and a volunteer firefighter. He is passionate about improving people's lives through making financial services more accessible.

Still searching?