Topic Eight: Retirement Income Calculators

In this episode I talk you through how long your retirement income might last you by working your details through the Moneysmart tool. Even if you choose not to use the tool yourself, this episode will help with guidance in terms of what information you need and decisions you will have to assume to help a financial adviser give you the most accurate outcome for predicting how much money you need to retire and meet your income goals.

Links:

Retirement planner - Moneysmart.gov.au

Action plan:

1) Sit down and work out what assumptions you are going to use for salary, other income, asset values (and debt), retirement income needs and how you want to invest your money. You might want to use current values or factor in future decisions to buy/sell assets and how you want to invest those funds to get an idea of how that might change the model.

Transcript

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SPEAKER_00 0:00

Hello and welcome to topic eight. Today we are going to be talking about how to use a retirement calculator. And I think a lot of people once they've worked out what their retirement income need is, they want to know how long can I afford to draw down this retirement income and what sort of money might be left and what maybe what sort of buffer is available to me if I draw down this particular retirement income. And we spoke in the last topic and spent a fair bit of time on how to work out that retirement income. That's hopefully going to be incredibly useful when you go through this exercise. Now you might find a retirement calculator on a number of different websites, including ones provided by your Superfund. And of course, financial advisors will use their own form of retirement calculator if you seek advice from them on can you afford to retire. Today I have chosen to use the federal government's Money Smart website. It's got a retirement calculator on it, and I've put a link in the episode notes for you to access that. If you're in front of a screen right now or you want to listen to this episode whilst you're in front of a screen, click on the link and you can walk through it. You will have to put some sort of dummy numbers in to keep progressing to the next screen, and then you can go back and play around with it later. I think what you'll understand as we go through it, it's got to raise a number of questions for you. So don't worry if you're not in front of a screen at the moment. Have a listen. This might prompt you of the things that you need to think about before you sit down and fully go through the retirement calculator yourself. Now, some people might not want to do this themselves, they might be happy to go to a financial advisor to put this together for them. And once again, that's totally fine, but what it will do is it will help you understand the information that's being asked of you and the decisions you need to make and think about if you want to sort of tweak that as you're going through the process with the financial advisor. Now, all calculators are built using different assumptions, and if you don't understand what's driving them, you might not understand why you're getting different outcomes. So you might use this calculator and then the financial advisor gives you something different. So we are going to talk a lot about the assumptions in the background and why it makes a difference to get them as accurate as possible. Also, my favorite saying is when it comes to modelling anything, garbage in is garbage out. And what this simply refers to is if you don't spend enough time getting reasonably accurate, reasonably reliable information, then the output or the result also isn't going to be reliable. So it's worth understanding the information you need to get the inputs right. It's also impossible to completely accurately forecast what things are going to look like in 20 to 30 years' time. And you could tie yourself up in knots, and I really have seen a lot of people do this trying to get it exactly right. But the reality is probably going to look different. For example, an unexpected health issue could just turn all your plans on their head. So the best approach is to take this as an opportunity to get a higher level picture of and give you the confidence to retire with the funds that you have or know what you need to retire. But try to be realistic about that rather than looking for the best case scenario and using conservative numbers. So when we talk through it, I'll talk about taking a lower expectation rather than a higher one. It's probably going to serve you better in the long run. Alright, so let's launch into the retirement calculator page in MoneySpart. And it will, before it takes you to the calculator, we'll cover two topics. I'll just run through these. The first is the importance of understanding your retirement income needs. And like I said, if you took some time in the last topic, hopefully you'll be well on top of this. You'll understand the different methods available to you, and you will have done some homework so that you've at least got a starting figure for this purpose. Now, the other thing it talks about is debt and why that's important to consider. I did touch a bit in previous episodes on the decision to retain debt into retirement or repay it, and that's a very individual one. Many retirees want the comfort of knowing that they paid off debt at retirement, and doing that sometimes can be an advantage for the assessment of assets by centrelink, in that you if you have your own home and any debt on it is not of any advantage to you because that asset of your own home is exempt. But repaying debt from your super may mean that your super balance is lower, which is an accessible asset. So that's obviously that advantage of comfort, potentially a lower asset value. But on the flip side of that, repaying debt in a lump sum may leave you with less retirement money, and that can cause worry and stress for people who might be more comfortable keeping a known repayment amount as part of their annual income. And the other thing is that if it is in your intention to sell that asset, particularly it's sometime in the near future, you may want to deal with paying off debt at the time of selling the asset. So that can include your own home. In one of the future topics, we're going to talk about downsizing, which is a very popular thing to do at retirement. And some people may want to defer repaying debt until they know what they're going to do, be doing with resizing. Sorry. The point is that debt isn't part of this model, and making a large withdrawal from your super to repay debt isn't part of this model either. So you need to understand what you're going to be doing and account for it when we're entering in asset values. So skip through those information pages, and the very first set of questions is going to ask you some pretty basic stuff. Your age, your gender. Gender is important because life expectancy is different for males and females, and this model will take you out to life expectancy. Your planned retirement age and your annual salary you will earn until you retire. Now, a couple of things on this salary. First, you put the number in before tax. So generally, your gross amount of salary, the calculator will work out taxable amounts for you. You will need to remember to lower it if you intend to go part-time, either pre-retirement or in retirement, and you'll be able to do this on subsequent screens. Look, if you're already retired or you're planning to retire in the next year, you might want to use leave this blank. It only works on a full year, so it may overstate a salary contribution pre-year retirement, but also might overstate any contributions you receive from salary because that's what it's also doing, assuming that you're getting at least that 12% and adding it to your super balance. You can also on this page nominate a partner, and so very important if you're doing a retirement calculator that you do it at the household level. Now, some people you know really want to keep their finances separate, and that's fine. It can be hard to separate finances, particularly if you're in there's a shared cost there, and you're not sure whether that shared cost will be there going forward. So once again, be conservative about that. But for most people, you want to do this as a household, particularly if you've got something like the age pension to factor it factor in, because that will be done at the household level. Okay, next it will ask you about your super balance and how your super is invested. And this is one of the areas, these investment options that will differ in in terms of the rate of return that might be expected from these investment options. It may not be accurate, it may also not match, the label may not match in the way that you're invested. So you have to pick for some from some preset investment options, and later on, as you go to the report, you'll see what the forecast is for each of these options. At this stage, you might want to you know make a high-level choice in terms of what might be the right investment option to match the one that you've got. Now on the super balance, just go back to that debt question. It's a really hard one to model completely accurately, but have a think about it. If you have a super balance of a million dollars and you have a mortgage of 300,000 and you know that you want to pay that off as soon as you retire, it may be better at this point to reduce your super balance by the debt so that it accurately reflects it because it doesn't really allow you to do that down the track somewhere in the future. So unless you draw a you know sort of excessive retirement income, so it might be better to keep it simple and reduce the super balance or another, we're going into assets shortly, and you might be able to reduce an asset balance there if the debt that you have relates to one of them. Next section is on contributions to your super. So, as I said, if you're not working already retired, you can skip this part. The assumption the model will make is that employer contributions are 12% of your salary. Now, some people are lucky enough to get a higher rate than that, and that's you'll need to customize it at this point. But also, if you get a lot of overtime and bonuses and super paid on them, and it's not a problem to understate, but if you want it to reflect a bit more accurately, have a think about this. You may need to increase the salary to include overtime and bonuses so that you get a representative amount of super contributions from that as well. Just make sure it's it's reliable and it's reasonably significant because you don't want to overstate your salary. On this screen, you'll also be asked if you add any extra contributions. Now, this is designed to be on an ongoing basis while you earn a salary, so it's things like salary sacrifice. People might put in an extra $50 a week, for example, in salary sacrifice, and that's when you would be adding it here. Some people wait until closer to the end of the financial year and see if there's an amount that they can top up with to take them up to the maximum cap, and you can put that out in here as well. Now, the next screen allows you to customize your salary in terms of any planned career breaks. Now, these might be periods of unpaid leave where you want to take a year off to go and travel, pre-retirement, other people who go on to part pay, like taking long service leave or extended periods of annual leave. And this is important because will it reflect even though you're still on pay for some of those leaves? Some people only go on half pay, but also it might mean that you don't get that regular overtime or bonuses. So you've got that opportunity just to customize here if your salary is not going to be continual leading up to your retirement. The next drop-down menu gets a little bit trickier as it asks you for assets you already own. And like I said, there's a fairly simplistic model, so there are some adjustments that you need to make manually here to make it as reflective as possible of what your future situation might be. The calculator will assume returns on these assets at a fairly standard long-term rate, and you'll see that when you get the report. What you don't want to do is overstate them because it'll show that you receive more investment income than what you actually do. So, for example, the first asset group it asks you about values for is shares and managed funds. So, point one, this does not include your super. A lot of people think because they have sort of shares and managed funds in their super that this is the time to write it down. Remember, you've already put that super balance in in an earlier question. You want to be conservative with values as they can go up and down, so don't overstate them. If you've got shares and managed funds that don't produce any income, remember that there is going to be an assumption made about the income, and you'll have to bear that in mind whether you exclude them from this model and you know, with the capital that it will show that you've got left at some stage or that you're using at some stage in the model, it's going to exclude them. But just being careful not to overstate your share value and share income. The next thing I'll ask you about is cash and fixed interest. Be careful not to include amounts that you've already earmarked for something. So whether it might be I've got money in my offset account but I intend to pay my debt down straight away. Well, don't include that here because it's not going to be available to you in retirement. Other things people keep cash aside for that that they've got earmarked is for upcoming travel, buying a new car, caravan, boat, whatever it may be, home renovations are the sort of things that you don't want to keep in this cash balance because the assumption the model is making that is that you keep this cash and fixed interest fixed interest into retirement and use it for that purpose. So you do get to put um to nominate when you're going to sell the asset. So you can adjust that way by saying, Well, I'm only having it for two, five years, but if you're using it in very short term, then really there's not much value in putting into this model because it really won't contribute to your retirement income too far into the future. Okay, investment property. This is probably the trickiest one. It'll ask you for the current value of your investment property, and what it's going to do there is obviously it's going to show you the capital that you might have available for you. And one of the problems with models like this is you can't draw down part of an investment property the same that you can with super or shares or cash. So you've got to be really careful that that amount that you attribute to the investment property is really what you what you have as available to you to fund your retirement. So if you have a debt on an investment property, don't include the full value because you don't own the whole part of that property. So, for example, if you have a property that is worth $600,000 and you've got debt of $300,000, you would be better putting in that the value of your property is $300,000 because that's what's available to you. It is going to forecast capital growth and income on the amount that you put in, but using that $300,000 is really a more accurate way to enter the property value. The next thing it'll ask you for is your income, which is expressed as a net rental yield. Now, unlike shares or cash where you can make a long-term return assumption, so you might say, well, your cash might get 2% a year, your shares might get 5% a year, wherever, whatever it might be, properties are really hard to forecast an income return from because they differ so much in their nature. So they're asking you to tell them what expectation of a net rental yield you have. Obviously, if you're not getting any rent from that property, say it's a holiday home, you're not going to include it here. Um, so the thing to remember that the income they're looking for is after expenses. Now, don't include tax here, they've got to do the tax calculations for you. It is going to be what do you receive as rent, and then what are your expenses, whether it be um rates, maintenance, think of things like maintenance that might crop up every year, and then calculate what that net return is. So, say on that $600,000 property, you get about $20,000 by the time you deduct from the rent the expenses incurred on that property, then the net rental yield is about 3.3%. So $20,000 as a percentage of $600,000, and that's the figure they're looking for there, that 3.3%. So what's going to happen is the $600,000 is going to continue to grow in value, and then the yield, because it's a percentage of the increasing value of the property, is also going to adjust going forward. It gets tricky where you have that debt because if you put that your rental yield is, or if you said that okay, I'll get 20,000 income, but it's only on a $300,000 share of the property, that might be overstating the amount of income you receive as a percentage. So you're going to have to play around with it, and it's really hard to get that exactly right. Um, and the other thing is that if you intend to sell it at some stage, if you don't say you'll need to add it back into another asset if you've got to put it in cash, you're going to put it in super, and this is the part that gets really tricky to get right. Now, some people will just leave the assets as they are, thinking that the value of them, whether they're in one asset or another, is still going to be there for my retirement funding, and that's reasonably fair. There's going to be different tax treatment. Um, if you want to get this right, apart from playing around with it a lot, this is where it might be better to get a financial advisor to help you with modeling the more complex your asset scenarios are. When you finish filling this section in, the next page will actually take you to that preliminary estimate of how much income you could draw a year and until life expectancy, and what you sort of after this, what kind of assets you're left with and what kind of income you might be able to produce. This might be enough for you if that gives you the outcome that you're looking for and just gives you that confidence to say, Oh, look, I look, I'm feel confident that I'm fairly well on track. You can leave it at this point. In the next section, you can start to customize your retirement income because what it will be showing you at this stage is how much you could draw potentially a year through to life expectancy. If you have no intention of drawing that much, then this is where you can start to play around with moving down that retirement income. And on there's it, there's two tabs, one's simple, one's detailed. On the simple, you can literally slide the scale. They've got a marker that says here's 70% of your current income to the projected income, and so that you can play around with it. This might also be helpful at this point to see how far you down you have to slide the scale to get it to the model to last, your money to last, sorry, until your life expectancy. If you choose the detailed option, it goes into a bit more of a detailed breakdown of your retirement income spending. This might be a double up if you've already done the work from topic seven because you will be repeating it again with your budget or spending tracker. If you haven't done that, this could be a tool you could use to start putting in your regular expenses and get an idea of that retirement income. It also allows you to put in those lump sum withdrawal needs. And I had recommended in the last topic that you do an annual income that has a contingency for lump sums, as we know they'll differ from year to year, and the timing is very hard to be accurate with. But if you wanted to separate them in and put in some very known lump sums, this gives you an opportunity, it gives you different categories of lump sums where you could put money in here. After this page, you get to change some of the options we talked about earlier. The first is the investment option. Now you can nominate here if you are you intend to change your investment option at retirement. We had a pretty good discussion about this in topic one, so I'm not going to go into the reasons why, but if you were say growth and you want to change to conservative, here's a screen that allows you to do that so that you can see the impact of changing investment options on your retirement funding. The next area is going to allow you to customize contributions. So this is helpful if you want to know if you added in that extra every week. So instead of adding 50, you might want to add 100. How much of a difference does that make to your retirement? Funding, but it also allows you to add in some lump sum contributions. So if you know you're going to sell an asset or you've got some money that might be coming to you in the next few years, you can add that in at this point so that you can see once again how much of an impact that'll make to your retirement funds. You can play around here with changing your retirement age too. So if one of your thoughts is that oh boy, things aren't looking so great, I might have to work a few years longer, go back and change your planned retirement age from the start to a new one here. And finally, you can review your retirement income. So if playing around with the sliding scale, you're thinking I need to perhaps decrease my retirement spending, you can put different amounts in here and different lump sums to see what a difference it'll make you in the final outcome. And once you've done all these things, you get an option to download a PDF report of the outcome, and on the report, you'll get a summary of all your input information. So you can go and check this and make sure it's accurate, and if it isn't, you may need to go back and do it again with the new information. Sometimes it's handy just to have a report in front of you, and you can work out oh, okay, this is where I can make some tweaks. From approximately page four of the report, you will see the assumptions the model is based on. Now there is the ability to change some of these assumptions, not all of them. There's a settings button that looks a bit like a cogwheel. You'll see it in the entry part of the calculator. You can click on that. For me, one of the most useful ones to customize is it allows you, it is the model assumes that you want to see if you can receive age pension at some stage in the future. But there are a couple of assumptions it's based on which you can customize here. So, firstly, you can say whether or not you want to see that. Secondly, you need to nominate whether you're a homeowner or not a homeowner, and also entering in personal asset values because remember your own homes exempt, but things like cars, boats, caravan, house contents, and collectibles are all things that are accessible and you need to put in here to make this an accurate assessment for Centrelink. Now, remembering what you put into this model is would need to be accurate for what you put into a Centrelink application for age pension. So we talked about this in topic six. If you overstate or understate things, then it may show that you're either eligible for an age pension earlier than you think or may get more or less. So try to be reasonably accurate if it's important for you to understand when age pension might kick in. You can also change assumptions like an annual growth for your salary, they've got a long-term forecast for wages growth, but we know that some people have enterprise agreements that could be higher or lower, and some people just don't get an annual salary review and may want to be conservative and move this number down. Otherwise, it's just going to keep growing your salary if you've got a number of years to go until retirement. You can change the numbers for the costs of your super, the admin fees, and the investment fees, and also whether you're paying any insurance premium fees. For some of the other figures, such as investment returns, inflation, etc., I really want to urge caution here. These are averages over a longer time frame. They've been well researched, and if you change them, particularly to make them look higher, based on a good year or a good couple of years, it might not give you an accurate picture of how things play out. So I'd be cautious about playing around too much here, particularly to give you a better better case scenario, might not be accurate. At the end of the day, when you've finished playing around and making changes, this report should give you an idea of how well on track you are to meet retirement goals. It is a higher level picture, it should be viewed as a tool to help you make decisions but not to rely on them. It is really just a guide as to you know to give you the confidence you know when you can retire or what you will need as income and what you'll be able to draw as income. There might be a mismatch here and it'll help you identify that. It's really a tool that is best done in pre-retirement, but you might already be in retirement and you might be thinking, um, I did this exercise five years ago, and now that I know things are different, I want to do it again to see you know what what a difference it makes to my retirement outlook. It would be great if you're taking this in to a financial advisor, you know the answer to some questions now to make sure their model is going to be accurate. Remember, they're going to have their own assumptions, it might give you a slightly different outcome. I hope it's useful for you, and like I said, really gives you that confidence because the biggest question when I talk to people planning retirement is can I afford to retirement? This is the tool that's going to answer it best for you. Okay, in our next topic, we're going to talk about employment decisions you might make at retirement or in the lead up to it and the difference it can make for your retirement income. See you then.