All our long term benefit projections are going to offer the user a choice of three deflators for inflation:
"Today's Dollars" where the projected amounts have been deflated to the calculation date using an AWOTE assumption - typically 3.5%
"Deflated Dollars" where the adjustment has been based on CPI assumptions - typically 2.5% p.a.
"Future Dollars" where no adjustments have been made.
Today's Dollars converts the future benefit or income into today's relative buying power. Salaries and community living standards tend to grow faster than price inflation. For longer term projections we believe it is the best adjustment to provide insight into the relative future purchasing power. Treasury models tend to use a CPI deflator. Age Pension has a minimum payment objection linked to wages.
A second objective beyond encouraging the user of the calculator to work in inflation adjustment terms is to have stochastic presentation of results. What we mean by this is that ranges of answers are provided for future outcomes, each with an associated probability of occurrence.
The combination of both of the above factors means clients will have a far greater appreciation of risks that may be involved with longer periods of time. It will also encourage a more objective assessment of the clients risk tolerance and steps that can be taken to manage these risks to acceptable levels.
The NetActuary Team