Retirees looking for a simple way of working out how much income they should draw from their superannuation each year can try this simple rule of thumb: draw down a percentage based on the first digit of their age; and add 2 per cent if their account balance is between $250,000 and $500,000.
Using this approach a retiree in their 60s with a $350,000 superannuation pension would draw down 6 per cent (for their age) plus 2 per cent, which is $28,000.
A retiree aged in their 70s with the same balance would draw down 9 per cent a year.
A team of actuaries came up with this approach to drawing down income in retirement, presenting their findings at an Actuaries Institute conference earlier this year.
One member of the team, John De Ravin, says the problem the group was trying to deal with is that many retirees worry that they will run out of money well before they die and only draw down the minimum they are required to take.
Under the superannuation rules a retired person under age 65 must draw a minimum of 4 per cent from their pension account each year. Between age 65 to 74 the minimum rises to 5 per cent and then between age 75 to 79 it rises to 6 per cent.
Between age 80 and 84 the minimum payment amount rises to 7 per cent; between age 85 and 89 it rises to 9 per cent; between age 90 and 94 it rises to 11 per cent; and for anyone over age 95 it is 14 per cent.
De Ravin says the problem with taking the minimum is that people end up with a retirement lifestyle that is too frugal. Many people could afford to spend more of their super each year but they have no idea how to work it out.
The actuaries did a lot of modelling to come up with their guidance but then boiled it down to a simple rule of thumb to make it easy for people to understand.
The rule of thumb is based on a few assumptions. It was modelled for a single homeowner. De Ravin says it is more complex to model for a couple but the group is doing some work on that. It is based on a real rate of return on the pension balance of 3.5 per cent a year.
De Ravin says that a retiree who draws down income from their super using the rule of thumb will end if with 22 per cent less in their account at age 85, compared with a retiree who draws down the minimum.
However, he says people’s lifestyle expectations change in their 80s and their spending tends to reduce as they travel less and scale back their social life.
De Ravin says: “The majority of Australians are members of defined contribution superannuation schemes and at retirement they apply the balance of their account to start an account-based pension.
“Most people are risk averse and it is hard for them to work out how much of their savings they should live off at any point in time.
“In our work our focus was, given that a retiree has ‘x’ amount in their super, what is the best amount to spend and enjoy life now without too much risk that lifestyle will suffer later.”
Another commonly used benchmark for retirement income is that retirees should aim for a replacement rate of 70 per cent of their salary.
De Ravin says retirees can use the rule of thumb to work out their retirement income and then compare it to the 70 per cent replacement rate to see how it compares.
“Our concern in this work was with people who default to the minimum pension payment. We think that is a conservative amount and was never intended to be a guide.
“The problem is that unless people go to a financial planner they have nothing to go on.”