Retirement calculators letting people down
Superannuation fund members are being ill-served by financial calculators which that fail to take account of market volatility, according to former Cooper Review chairman and now Challenger Retirement Income chairman, Jeremy Cooper.
Cooper has published an analysis in which he argues more time should be invested into developing calculators which take account of market volatility, rather than relying on assumptions that market returns are constant.
"Most calculators and tools use long-term average investment returns as a constant compounding factor," he said. "That is, they assume that the long term average happens each and every year when we all know it does not."
"This is called a ‘deterministic' approach. You key in a fixed investment return (say 6 per cent) and that determines what you end up with. There are often warnings in the instructions or in a footnote that things might not go to plan, but that doesn't change the fact that these calculators sugar-coat what really happens," Cooper said.
He noted that for younger people with smaller super balances, using long term average investment returns was probably OK because any impact from market gyrations would typically be more than offset by regular and much smoother contributions.
"Those closer to retirement, on the other hand, have larger balances and so the gyrations are not easily offset. Those approaching or in retirement are most affected," Cooper said.
He said a calculator that only illustrated an average outcome had roughly the same margin of error or chance of success as tossing a coin.
"A big improvement could be achieved if calculators provided a simple range of probable outcomes," Cooper said.
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