There is growing concern among actuaries and consultants working in the superannuation industry that retirees increasingly see their retirement benefit as capital that should not be touched, while they live off the interest and dividends generated by that capital.
The problem is that for most this is unrealistic. In the latest commentary on the issue, Nick Callil, the head of retirement solutions, Australia, at Willis Towers Watson, has written a paper called Superannuation is for Spending.
“It should not be contentious to assert that superannuation savings accumulated during working years should be spent down, ideally as regular income, in the years after employment ends,” Callil says.
“Too often, even this limited purpose is not reflected in public discussion of the super and retirement system.”
Callil says there is often an assumption that assets individuals have accumulated for retirement are not to be drawn down during the retirement years.
According to this thinking, the amount taken into retirement acts as a capital base to generate investment earnings which can be spent.
Many retirees consider their retirement income to be the dividend stream generated on a share portfolio
“For most retirees this thinking is simply unrealistic,” he says.
“Living off the interest income from term deposits or the dividends from a share portfolio sounds attractive but for most retirees this sort of strategy is unlikely to produce an income they might regard as adequate.”
He estimates that to achieve an ASFA comfortable retirement income – $43,600 for a single person and $61,500 for a couple – using a spend the income strategy, a couple would need around $1 million invested in high-yielding shares or $3.9 million invested in term deposits.
These amounts are well above average retiree super balances.
Callil says super funds are part of the problem. They do not give their members much guidance on how to set up their retirement incomes strategies.
An approach many retirees take is to take only the minimum drawdown from their super fund.
Callil says: “While minimum drawdown throughout retirement may be an appropriate strategy for some, it is reasonable to ask whether such a strategy is actually too conservative, deferring spending that could contribute to quality of life in early retirement and increasing the chance of leaving unnecessarily large amounts behind at death.”
A minimum drawdown strategy has an unacceptably high risk of wastage.
Another approach is a constant drawdown strategy, where are an amount that can be expected to last for life expectancy plus three years is spent each year.
“With this strategy the risk is running out of money before death. For many retirees, this would be unacceptable,” Callil says.
This suggests a middle ground, which involves a modified life expectancy strategy, with life expectancy reviewed regularly, and with floors and ceilings to provide a better balance of the risk of running out and the risk of wastage.
Using this approach, the drawdown amount is reviewed on a regular basis, as life expectancy changes.
Callil says: “Ultimately, no spending strategy alone can ensure a stable income for life. Ideally, as well as developing a default spending policy for retirees, funds would offer longevity products, such as deferred annuities, to provide ongoing income where a retiree outlives their savings.”