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How much super do you need?

Wednesday, 16 September 2015

You might be aware that ASFA maintains a quarterly survey of the cost of living in retirement. Dividing retirees’ expenditure into categories, ASFA finds that a retiree couple who want to live comfortably need approximately 59,000 per year. There are other flavours of the standard (for singles, for a modest standard of living, and for the elderly), but I’m most interested in the comfortable couple scenario.

If you take the ASFA income amount as what you need each year, the obvious question is ‘what level of savings is required to support that income for a known period?’ This opens the proverbial can of worms, because it depends on many assumptions about the future – what return will you earn in retirement, what will inflation do, how much age pension will you receive and so on? And people have been asking what the impact of the new assets test from 2017 will be.

Anyway, it turns out that not only does it depend on assumptions about the period in retirement, but also on when you plan to retire. In particular, people about to retire will need less than those planning to retire in 10 years, even allowing for converting these amounts to today’s dollars. ASFA have recently said that a couple needs $640K to get 25 years of income in retirement, and that’s right if you plan to retire in 2040. For those retiring now, around $500K will deliver the same expected income.

Why the difference? It’s all in the age pension means tests, and how you convert future dollars to today’s dollars. The means tests work by reducing your pension for any assets or income over certain thresholds. For example, a couple loses 50c of pension for every dollar of income they earn over a threshold amount of around $7,500 per year. These thresholds are indexed (increased each year) in Australia with price inflation, or CPI. But when we convert these to today’s dollars we use wage growth, which is higher than CPI, so in today’s dollars they are reducing over time. In 25 years’ time, you will be penalised for holding a smaller amount of assets than you would today, and hence you need more of your own super to cover the shortfall in age pension.

In the Retirement Income Simulator, we have kept things simple up to now by assuming that the thresholds are indexed at the same rate as we use to convert to today’s dollars. But as the simulator evolves, we are able to make it more sophisticated, so the latest release includes CPI indexation of the means test thresholds.

For the record, here are the assumptions, I’m using for my $500K now:

• Couple are homeowners aged 67 with no debt and no other assets or income
• Their super is invested in an account based pension
• Their super earns a net investment return of 7%pa
• Indexation of age pension 4%pa
• Indexation of means test thresholds 2.5%
• Assets test threshold $375K as of 1 January 2017, discounted one year
• Desired total income $59K for 25 years, indexed at 4%pa
• Asset requirement is in today’s dollars, discounted at 4%pa

Here’s what it looks like in the Retirement Income Simulator.

And if you’re really interested in all the details, here’s the report for this scenario.

Tags: retirement-planning

Calculator Updates for July 2015

Monday, 6 July 2015

A new release went live today, with a mix of user interface and legislative changes.

Legislative changes

On 22 June the Parliament passed the Fair and Sustainable Pensions Bill, increasing the full pension asset range by up to 31% (couples) but slashing the part pension asset range by around 48% from 1 January 2017. We have included this in the 1 July release assuming the new taper rate and the present value of the new assets thresholds are applicable now. We suggest all RIS users review their retirement plans in light of these changes:

	As at 30 June 2015	From 1 January 2017
Single home-owner asset threshold	$202,000	$250,000
Single not home-owner asset threshold	$348,500	$450,000
Couple home-owner asset threshold	$286,500	$375,000
Couple not home-owner asset threshold	$433,000	$575,000
Asset taper rate	$1.5 per fortnight for every $1000 of assets over threshold	$3 per fortnight for every $1000 of assets over threshold

In addition we have updated our calculation engine with the following changes effective 1 July 2015:

• Government co-contribution lower income threshold from $34,488 to $35,454
• Updated figures for the Age Pension income test thresholds and deeming thresholds as follows:
  • Income test threshold is now $162 for single and $288 for couple
  • Deeming threshold for the lower deeming rate is now $48,600 for single and $80,600 for couple

The ‘Clean Energy’ tax cuts, which were supposed to commence 1 July 2015, were recently repealed and hence are not included in this release.

User Interface changes

We all tend to glaze over when presented with those necessary but dense T&Cs. Well the RIS has had a front page makeover, and here is the same content but presented better. Four important things you need to know about using the RIS, but a simple icon and a brief heading gets the message across more effectively.

We’ve also changed the way charts get incorporated into the PDF. Previously we converted the chart to an image before putting them onto the pdf. However now we re-create the chart on the server and add it into the PDF. You can see the differences in the following two images:

before: after:

Notice how much sharper the text is - if you zoom in on the PDF text it will now be crystal clear, no matter the size.

before: after: This also means that printing your PDF will give you a much better quality printout.

Tags: retirement-planning pdf updates terms-and-conditions

Retirement Income Simulator gets a responsive redesign

Friday, 15 May 2015

The user interface for the Retirement Income Simulator online calculator has been redesigned. The new interface design features a responsive layout, with custom layouts for desktop PCs, tablets, and mobile phones.

In addition to the new design, we've added two new features.

Tutorial

A step-by-step tutorial has been added explaining the projected retirement income graph. This tutorial explains the basic operation of the calculator, and demonstrates how altering certain inputs can affect the retirement income projection. It opens by default, but can be skipped.

Text summary

For users who relate better to an infographic style presentation, the calculator now provides a simple text summary of their retirement projection with the key numbers highlighted. The summary is separated into the following time periods:

• Now
• Career (displayed for non-retired users only)
• At retirement
• Early retirement (displayed for retired users only)
• Beyond

We've also updated our calculation engine with the following legislative changes:

Effective March 20th

• Age pension deeming rates on financial investments are reduced by 0.25% as follows:
  • Lower deeming rate is now 1.75% for financial investments up to the threshold
  • Upper deeming rate is now 3.75% for financial investments above the threshold
  • The deeming threshold is $48,000 for singles and $79,600 for couples
• The maximum Age Pension has been increased as follows:
  • The singles pension rate has been increased to $860.20 per fortnight
  • The couples pension rate has been increased to $1296.80 per fortnight

Infographics for simplified retirement planning

Monday, 6 April 2015

The Retirement Income Simulator’s summary screen is a great way to get a high level view of your future, and today it’s received a substantial visual upgrade. We’ve gone from simple blocks of text:

…to something a bit more visually engaging:

The new summary screen contains all the same information as the old screen, as well as some new features. Now you can see an estimate of the chance of outliving your super, and an explanation of how changes you’ve made using the compare scenarios feature could affect your retirement.

You can try the new summary screen in our live demo.

Tags: retirement-planning design compare-scenarios