Retirement Income Simulator

Further to our post on 14 July, the required regulatory changes were released in an update that included the following changes:

  • Standard default inflation rates of 4% p.a. for salary growth and 2.5% p.a. for price growth
  • Ensure that default investment returns are consistent with the standard default inflation rates (RG 276.212)
  • Future values are deflated using salary growth for the period up to retirement age and price growth for the period after retirement age
  • Relevant disclosure updates that reflect these changes

The changes that will be most obvious to users of the Retirement Income Simulator are in relation to retirement adequacy. To speak meaningfully of a level of retirement income, you need to index the income at the same rate you deflate it. ASIC now requires that retirement income is deflated with price growth; we have therefore changed the indexation of retirement income to price growth, instead of wage growth. This will give the appearance that retirement incomes are higher, last longer or both. In reality this is because retirement incomes grow more slowly under the new approach, and will not keep pace with improvements in living standards enjoyed by the wage earning community.

A related change is the presentation of the Age Pension. In reality, the Age Pension is indexed with the higher of wage and price inflation; in the long term this is wage inflation. Hence in the Simulator, you will see the Age Pension growing in real terms even after the maximum entitlement is reached. This is because it increases with wage growth, but is being deflated with price growth.

Tags: regulation