Calculating A Retirement Fantasy

Sydney Morning Herald

Saturday November 10, 2007

Annette Sampson

They used to say there were lies, damned lies and statistics. A modern alternative might be lies, damned lies and technology.

Unless you're a dab hand with a spreadsheet, it's likely you've embraced the growth of online calculators as a convenient guide to your financial needs. Thinking of buying a home? Just call up a home loan calculator to work out your potential loan size and repayments. Don't have a clue whether you're saving enough for retirement? Enter your age, salary and savings to see how much super you'll have at retirement and what sort of income that's likely to give you. Want to know your life expectancy, whether a transition to retirement pension will benefit you, how much insurance you need, or whether your household budget balances? You can do it all online.

But research by Rice Warner Actuaries suggests you shouldn't rely too heavily on the information generated. Rice Warner studied the calculators on the public sections (and some members-only sections) of the websites of 79 superannuation funds. It found a wide range of calculators dealing with a wide range of financial issues.

But the results often varied dramatically depending on the assumptions built into those calculators. As an example, Rice Warner looked at the results from superannuation calculators. It used the example of a 30-year old person wanting to retire at 65. They already had $25,000 saved, were earning $50,000 a year, and receiving the 9 per cent compulsory super payment.

Rice Warner plotted the results from 14 calculators and found projections ranging from $214,000 to $1.19 million. No, that's not a misprint. The researcher found the highest estimate was more than five times that of the lowest estimate based on identical investor information. With one calculator, the investor would think they'll be rolling in money come 65; with the other, they could be pushing the panic button.

Part of the reason for this disparity is that four of the 14 calculators (those generating the highest benefits) projected the benefit in actual dollars, rather than indexing it to take account of inflation. This sort of calculation tends to generate amounts resembling telephone numbers rather than meaningful retirement benefits and is not approved by the Australian Securities and Investments Commission.

Rice Warner says the benefit generated using these four calculators ranged from $529,000 to that figure of $1.19 million.

But even when funds did the right thing and calculated the benefit in today's dollars, the results still varied significantly. The range for the calculators using this approach was $214,000 to $470,000 - with the highest estimate still more than double that of the lowest. ASIC's own calculator generated a benefit slightly above the mid range of the 10 "today's value" estimates.

It's not hard to see how super calculators can generate rubbery figures. Minor differences in things like earning rates and effective tax rates can have a big impact over the long periods used in many super calculations.

But these weren't the only problems uncovered. Rice Warner found a small number of calculators were not updated regularly to keep up with legislative changes (a bit of a problem given the massive changes to super that came in on July 1), while a minority also failed to meet ASIC's requirement of allowing the user to change the default values.

Rice Warner says disparities were most obvious with super and retirement calculators, though differences could also be found in other areas. The research suggests that while the industry has been working to make calculators more consistent, little has changed from 2005, when a review of 24 superannuation calculators by ASIC found projected benefits for a 35-year-old man intending to retire at 65, with $50,000 in super and a salary of $55,000 per year, ranging from $283,000 to $966,000.

As an outcome of that review, ASIC released a class order on generic calculators, providing relief from the financial services requirements where the calculator met basic standards. These included that the calculator allow the user to change the assumptions, that it should not promote a particular product or services, that the assumptions should be reasonable, that the calculator's limitations be clearly disclosed, and the assumptions - and reasons for them - clearly explained to the user.

In April the Investment and Financial Services Association followed up with a best practice guidance note for members on online calculators. It had the lofty aim of ensuring "like" results where investors plugged the same information into different calculators. The note went into much more detail on the wide range of variables that can affect the results generated, but again stressed the need for current dollar values, realistic assumptions, and clear disclosure.

The note clearly demonstrates that some variations are inevitable. For example, even the question of whether earnings in a super fund were credited annually, quarterly, or monthly would yield a small difference in results.

But there is no reasonable explanation for the differences thrown up by ASIC's work two years ago, and Rice Warner's more recent research.

Some providers are not meeting even the basic requirements and their rubbery figures could prove harmful if investors rely on them.

© 2007 Sydney Morning Herald

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