Assumptions and Methodology - a guide to using My super simulator
Purpose and limitations
My super simulator is designed to give you a sense of how much you may need to retire and whether you are on track.
It is intended as an educational tool, helping you see the long-term effects on your superannuation of the things you may be able to control, and that can really make a difference, such as:
- the age at which you will retire;
- changing your investment mix;
- making extra contributions, either via regular salary sacrifice or as a one-off lump sum; and
- accessing and benefiting from the government co-contribution (if you are eligible).
However, my super simulator is a financial model and, as such, cannot accurately predict your end super balance. This will depend on:
- Your personal circumstances: unexpected things tend to happen in life. You may decide, or find you need, to take time out of the work force. You may also move to a lower or higher paying role or even change careers. As a model, my super simulator cannot predict or take account of your individual situation and assumes you make steady, predictable contributions to your super over time.
- Unpredictable external factors beyond your control, such as investment earnings, tax and inflation. My super simulator assumes these will operate at set, steady rates over your working life. Although this may seem somewhat simplistic, these assumptions are essential to allow the simulator to demonstrate the effect of things you may be able to control.
Wherever possible, my super simulator does try to illustrate the effect of some of these unpredictable external factors. For example, it shows you how your projected superannuation savings may fare in different investment markets, helping you understand the impact of investment earnings on your end super balance.
While my super simulator is a useful starting point, it cannot replace professional financial advice and should not be used as the basis for any investment decision. To build a full understanding of your retirement planning position, you will need to work with a professional financial planner who can help you to develop a plan based on your personal situation, time to retirement, risk profile and life goals.
It is important to note that my super simulator does not record or store any of the data you enter for future use in any other AMP planning or simulator tool.
How does my super simulator work?
This section provides a simple explanation of the methodology and assumptions that sit behind each of the simulator's screens. It is intended to help you better understand how my super simulator works.
Rice Warner Actuaries has independently verified the that the calculations are accurate and consistent with the assumptions.
Age input screen
We use your age to calculate the amount of funds you can accumulate between now and your retirement. My super simulator allows you to input your current age from 14 to 70.
The default calculations are based on you retiring at age 60, but my super simulator allows you to also test the impact of retiring sooner - or later. You may change your retirement age from 55 to 75.
Annual salary input screen
My super simulator uses the annual income you enter to calculate two things:
- your 9% compulsory super contributions, so we can make some projections for your savings at retirement. To do this, we simply use 9% of the entered amount and assume that your salary will increase by 4.5% per annum over time. This is equivalent to the average annual increase taken over five years in the most recent Average Weekly Ordinary Time Earnings (AWOTE) data available from the Australian Bureau of Statistics (March 2007).
My super simulator assumes that compulsory Super Guarantee Contributions remain steady at 9% of your specified salary over your working life. - Your post-retirement income is a specified percentage of your after tax salary in the year you elect to retire. The specified percentage is defaulted to 65%. My super simulator allows you to change this percentage from the results screen.
Your salary at retirement is calculated assuming that your current salary will increase by 4.5% until that time. Please note that this makes no allowance for increases in salary due to performance or productivity. - If your employer contributes more than 9% of your salary as their contribution don't worry, you can simulate this by using the salary sacrifice field to increase your contributions into super. For example, if your employer puts in 10.5% of your salary as their contribution, then you can include the additional 1.5% (the amount over and above the 9% Compulsory Super Guarantee) as a salary sacrifice contribution.
Current super savings input screen
My super simulator uses the current value of your super, your estimated future contributions (calculated as your 9% compulsory super and any additional contributions entered) and your specified investment mix to project your super savings at retirement.
Investment mix input screen
My super simulator lets you model six different investment mixes. The information on screen (below the line) explains each of the investment mixes, showing the percentage of each invested in defensive v growth assets and relative risk.
The rates of investment returns and fees applied are as follows:
| Investment mix | Investment returns (per annum) | Total Fees (per annum) |
||
|---|---|---|---|---|
| Weak market performance |
Average market performance |
Strong market performance |
||
| Cash | 6.35% | 0.75% | ||
| Conservative | 3.5% | 5.5% | 7.5% | 2.10% |
| Moderately conservative | 4.0% | 6.0% | 8.0% | 2.15% |
| Balanced | 5.0% | 9.0% | 11.0% | 2.20% |
| Moderately aggressive | 5.5% | 9.5% | 11.5% | 2.25% |
| Aggressive | 6.0% | 10.0% | 12.0% | 2.30% |
At retirement, my super simulator assumes that all funds are transferred into a pension and invested solely in cash, delivering an investment return of 5.6% p.a. after fees. No allowance is made for the cost of advice during the transition from super accumulation to retirement.
Returns can vary considerably, so to illustrate this, we have shown 3 projections for each investment mix on the results screen. These are average market performance, weak market performance and strong market performance. Please note that the decision made to include 3 projections is based on our assumption that actual returns could vary considerably.
The fees used are based on AMP's Flexible Lifetime Super, including new management fee rebates to apply from 1 July 2008, and are assumed to remain consistent throughout the projection term.
My super simulator assumes investment earnings are credited to your projected super balance at the end of the year. My super simulator also assumes any management fee rebates are paid at the end of the year on the end of year balance.
Description of investment mixes
| Investment mix | Summary | Relative risk | |
|---|---|---|---|
| Cash |  Growth assets: 0% Defensive assets: 100% |
The investor's main objective is to achieve a competitive cash based return before fees and taxes by investing in a wholesale deposit with an Australian bank (currently AMP Bank). | low |
| Conservative |  Growth assets: 30% Defensive assets: 70% |
The investor's main objective is stability of capital and they are prepared to accept lower returns to achieve this objective. A low level of volatility can be expected from time to time, and overall returns are likely to be relatively low. | lower |
| Moderately conservative |  Growth assets: 50% Defensive assets: 50% |
The investor's main objective is to maintain relatively stable returns. Capital stability is still a priority, however, they are willing to accept some volatility to achieve these returns. | lower - medium |
| Balanced |  Growth assets: 70% Defensive assets: 30% |
The investor's main objective is to achieve balanced returns to meet their medium to long-term financial goals. The aim is to achieve some capital growth. Investors are willing to accept moderate level of volatility to achieve these returns. | medium |
| Moderately aggressive |  Growth assets: 85% Defensive assets: 15% |
The investor's main objective is to accumulate assets by targeting capital growth over the medium to long-term. They are prepared to accept higher volatility and moderate risks to achieve these returns. | medium - higher |
| Aggressive |  Growth assets: 100% Defensive assets: 0% |
The investor's main objective is to achieve high long-term growth. Capital stability is not a concern as they are prepared to accept high volatility to pursue potentially greater long-term returns. Investment choices are diverse but carry with them a higher level of risk. | higher |
Additional contributions input screen
Using this screen you can indicate if you make any additional contributions to your super, over and above the compulsory 9% your employer puts in. If you do, you are also asked to indicate the type and amount of additional contribution. This allows my super simulator to treat your contributions appropriately in projecting your final super balance.
My super simulator assumes all contributions to super are made at the start of the year and treats additional contributions as follows:
Salary sacrifice contributions
- My super simulator assumes any salary sacrifice contributions will increase in line with salary and continue on an annual basis until retirement.
Personal (after tax) contributions
- My super simulator automatically applies any personal contributions towards the Government Co-contribution and includes this in your projected super savings at retirement. Eligibility for any Co-Contribution is determined by your assessable income.
- My super simulator assumes that the salary range determining eligibility for the Government Co-Contribution will increase by 4.5% per annum (in line with AWOTE).
- My super simulator assumes that regular personal contributions increase in line with inflation and that any personal contributions (either lump sum or regular) are non-taxable contributions.
Contributions limits
As part of the simpler super reforms, the government imposed new caps on contributions that will apply from 1 July 2007. These caps may vary depending on your age.
As a general rule, the cap for concessional contributions is $50,000 per year indexed to AWOTE in increments of $5,000. For those people aged over 50, there are some transitional arrangements where the cap has been increased to $100,000 per year (with no indexation). The transitional arrangements will be effective until 30 June 2012 at which time the cap will reduce back to the standard $50,000 (indexed).
Concessional contributions can be made from a range of sources. The most common sources would be
- employer SG contributions (currently legislated a minimum 9% of salary);
- salary sacrifice; and
- personal Deductible Contributions (eg, Personal contributions where a tax deduction is claimed).
If you are making concessional contributions (such as salary sacrifice) on top of your employer’s 9% super guarantee contributions, please keep the relevant contribution caps in mind. If you exceed the contribution caps, you will be liable for excessive contributions tax, which is levied at 46.5% of each contribution rather than the 15% contributions tax.
My super simulator applies the following rules for concessional contributions:
| Contribution Type | How it's calculated | Calculation |
|---|---|---|
| Employer SGC | 9% of Salary | For under 50yrs of age Salary x 9% + Salary Sacrifice ≤ $50,000* For 50 and over Salary x 9% + Salary Sacrifice ≤ $100,000 (N.B. amounts over these limits will incur excessive contributions tax) |
| Salary Sacrifice | Input via slider (per month) |
*this is indexed with Average Weekly Ordinary Time Earnings and increases are effective using increments of $5,000
You can see the impact that the contribution caps and excessive tax have on your super using my super simulator. If you think these deductible contribution caps impact you, you may like to try modelling some non-concessional contributions (eg personal (after tax) contributions) using my super simulator.
A personal (after tax) contribution is simply any contribution where you do not claim a tax deduction. In the case of my super simulator, personal (after tax) contributions would be made from your after tax income. With personal contributions you do not pay any contributions tax when you invest in superannuation (as you do with a concessional contribution) — unless you exceed the non-concessional contribution cap. And, if your assessable income is below $60,342pa you may be eligible to receive a co-contribution from the government — See strategy 5 in the AMP Super Centre.
The non-concessional contribution cap is $150,000 (or $450,000 averaged over 3 years if you are under age 65). Amounts in excess of these limits will be taxed at 46.5%. My super simulator also allows for the impact of these non-concessional contribution caps.
Your projected super savings screen
Your target
The number in the middle of the chart (in orange) is your targeted super balance at retirement. This is shown both as a lump sum and as annual income.
Based on our understanding of industry practice, your default target is calculated to provide 65% of your pre-retirement after-tax income every year in retirement. The default assumes you retire at age 60 and that you live to 100.
If you think you need more, or less, than 65% of your pre-retirement after-tax income to live comfortably in retirement, you can simply adjust the figure by moving your target super savings line up/down using your mouse.
Your graph
The graph shows how your super savings may fare in 3 different investment markets. This is designed to help you understand the impact of investment market performance on your projected super savings.
The first bar (on the left) shows your projected super savings if investment market performance is poor.
The middle bar (highlighted in blue) illustrates the impact of average investment markets. This is the most likely scenario and should be the main focus of your attention.
The final bar (on the right) lets you see what could happen if investment market performance is particularly strong.
The rates of investment return used in each scenario are set out in Investment mix input screen guide.
The returns shown in each scenario are net after fees and taxes. My super simulator applies the default fees and applicable management fee rebates which are taken from AMP's Flexible Lifetime Super Product Disclosure Statement and are effective as at 1 July 2008.
My super simulator treats tax as follows:
- Its applies an average tax rate of 6% to earnings in the fund, allowing for imputation credits;
- It does not make any allowance for tax rebates on income tax; and
- Contributions tax of 15% is applied to taxable contributions.
Test the 'what ifs'
The sliders to the right of the graph allow you to test the 'what ifs', letting you see the long term impact on your super savings of some of the factors you may be able to control, like when you retire, your contributions or how your super is invested.
If you select a retirement age past 65, my super simulator assumes you satisfy the work test to make contributions from age 65 to retirement.
My super simulator lets you model the potential impact of a range of common contribution strategies that may be available to you. These include salary sacrifice, making personal (after tax) contributions or investing a one-off lump sum into your super.
My super simulator takes account of the latest government rules, allowing a one-off lump sum contribution to super of up to $450,000 over 3 years and applying the relevant contribution caps thereafter.
Today's dollars
You will notice that all figures on this screen are shown in today's dollars. This means that we have made an assumption taken account of inflation, applying a steady rate of 3.0% per annum to discount the projected savings back to today's value. 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.
A good first step - but not a replacement for personal advice
The figures shown on this screen are projections of your superannuation 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 professional financial advice and should not be used as the basis for any investment decisions.
Summary of Assumptions
- Income and the salary range for Co-Cont eligibility are assumed to increase in line with AWOTE (ABS Mar 2007)
- Gross rates of return are taken from FIDO (except aggressive profile which is growth + 0.5%)
- SGC is assumed to be 9% of the salary entered into the calculator by user.
- Projection assumes retirement at age 60 years unless another age is selected.
- Inflation rate assumed to be 3% per annum
- The AWOTE rate that is used is 4.5% which is the average annual increase in Awote taken over the last 5 years
- No allowance has been made for increase in salary due to productivity/performance
- At the age of retirement, all funds are transferred into a pension and invested solely in cash, earning 5.6% net of fees. No allowances are made for advice fees at the transition from accumulation to retirement
- Fees applied are the default taken from the FLS PDS, including management fee rebates to apply from 1 July 2008.
- Contributions are taken to be at the start of the year
- Management fee rebates are paid at the end of the year on the end year balance and investment earnings are credited at the end of the year.
- The Salary range for Co-Contribution eligibility increases in line with AWOTE
- Salary Sacrifice and member deductible contributions increase in line with salary, indexed by Awote
- Any lump sum or personal contributions increase in line with inflation
- Any personal contribution is presumed to be an undeducted contribution that is used to apply for the co-contribution.
- Any annual lump sum contribution is first counted for Co-contribution and any remainder applied as an undeducted contribution.
- Member fees are presumed to increase in line with inflation
- Any rates specified do not change throughout the projection.
- No allowance has been made for any tax rebates on income tax
- Average Tax rate of 6% applies to taxable earnings on the fund, allowing for imputation credits.
- Contributions tax of 15% is applied to taxable contributions
- Projected retirement income needs are assumed to be 65% of the member's after tax salary (excluding any salary sacrifice arrangements) at retirement unless another rate is selected. This income then remains constant until age 100 years.
- Inflation is used for discounting retirement figures back to current values.
- Max input age range for accumulation is from age 14 to age 70.
- For retirement ages after age 65, then we have assumed that the work test is satisfied to be able to make contributions to super.