By Matt Torney.
“You should take 4% a year.”
That’s the shortcut answer to a cornerstone question in the retirement income debate. At least it was until the onset of a pandemic. The minimum rate legislated by the Government is now 2% if you’re aged under 65. Rates were halved so retirees didn’t have to sell assets in a falling market. Here’s the new minimum income withdrawal rates in Australia for reference (until 30 June 2022 anyway):
Ignoring the new (temporary) rate of 2% for the time being, is a minimum of 4% going to be enough to fund a comfortable retirement? Better yet, what is a healthy withdrawal rate if not 4%? The answer depends as always on your circumstances. But we can at least provide some guidance here using tables and numbers.
Unfortunately, living off 4% won’t provide many with a
comfortable retirement if average super balances are anything to go—$384,539
for Men and $313,050 for Women[i].
A minimum withdrawal rate of 4% has men living off $15,382 a year and women $12,522
a year. Even if the house is paid off and you live in a remote shack on top of
a hill somewhere, that type of money isn’t going far. A ‘top-up’ from the Age
Pension will be necessary for retirees in this case.
Modest or Comfortable in retirement?
The amounts above come up way short when considering ASFA’s recommendations for a ‘modest’ or ‘comfortable’ retirement as well. According to the table below, at a withdrawal rate of 4.35%, you need $750,000 in super to realise a ‘modest’ income of $32,656 a year. That’s about double the average super balance for men and more than double for women (even combining the two figures for couples we still come up short at $697,589).
Now let’s say you have $250,000 in super at retirement. According to the table above, you will need to withdraw 13.06% a year from your super balance to ensure a ‘modest’ standard of living ($32,656 a year). For a ‘comfortable’ living you will need a withdrawal rate of 22.56% ($56,406 a year). Those withdrawal rates almost guarantee you’ll run out of money according to the following table:
[i] JUST HOW SAFE ARE ‘SAFE WITHDRAWAL RATES’ IN RETIREMENT? https://www.griffith.edu.au/__data/assets/pdf_file/0024/205683/FPRJ-V1-ISS1-pp22-32-safe-withdrawal-rates.pdf
In fact, the table above says there is a 79% chance you will run out of money if you withdraw just 10% of $250,000 for 20 years. Continual advances in life sciences add further to the risk of the well running dry.
Let’s go the other end of the spectrum and consider $1,500,000 at retirement. Well, the tables above say withdrawing 4.51% a year for a ‘comfortable’ lifestyle ($56,406 a year) provides a 12% chance of running out of super in 20 years’ time (we rounded up to 5%). The risk of running out of money goes up from there.
So what to think? Well, you can use the tables above to compare where you sit on the super safety scale. The sweet spot seems to be around the $750,000 mark where you can enjoy a modest living with a 4.35% withdrawal rate ($32,656 a year) and a small (2%) risk of running out of money in 20 years. That’s a long way from the “plus $1,000,000” that gets quoted so often in the media.
But we understand a super balance of $750,000 is still out of reach for many. Don’t be alarmed though. There are so many more factors to consider and don’t forget you can top up your income with the Age Pension. You may also be in the position to sell the family home and downsize to a smaller place down the track. The capital gain from the sale could be used to top up your super account. You can then invest in more liquid assets like shares which offer a dividend.
Then there are one-off events like an inheritance and other assets like share or property portfolios held independently from your super. Whatever the case, it is best to speak with your financial adviser to talk about how you can boost your super balance and give yourself the best chance of living a comfortable retirement. A long and healthy retirement is achievable for any Australian—no matter your super balance.