How much should you take from your Super each year?

One of the greatest challenges for retirees in Australia relates to the management of their retirement income. Unfortunately, the adage to ‘spend less than you earn’ doesn’t always work for retirees as most lack sufficient investable assets to live solely off the income generated by those assets (often receiving a top-up from the Age Pension). 

The government’s temporary halving of the minimum pension drawdown rates (info here) will give retirees with account-based super pensions and similar products more flexibility in the management of their pension assets while investment markets remain volatile.

The upshot is that eligible retirees with enough cash flow to ride out this period of extreme market volatility will not be forced to sell shares, property or other assets in a declining market simply to comply with the usual minimum drawdown amounts. By preserving more of their capital, they will have more invested funds retained inside superannuation to capture the investment market rebound when it inevitably occurs. 

As super pension drawdown rates come into focus, we have provided some insights in this article to help your understandings of retirement portfolio risks and to help you answer the common question, ‘How much can I withdraw annually from my super without the risk of it running out?’

Retirement risks

The superannuation journey can cover many decades, from a person’s working life through to retirement. The retirement risk zone (highlighted below) represents the critical years that incorporate the last two decades of our retirement saving journey (commonly referred to as the accumulation phase) and the first fifteen years of our retirement years (termed the withdrawal, drawdown or income phase). It is this transition period when many of the key risks that determine the sustainability (or otherwise) of our retirement income are at their most threatening.

The Retirement Risk Zone (red) is therefore a critically important part of the retirement investment journey. It includes the period where your superannuation balance, that you’ve worked hard to build before retirement, may reach its pinnacle.  In short, what happens when the largest amount of our retirement savings is at risk, matters.

It is during this phase that the best opportunity for improving retirement outcomes exists because, paradoxically, so much is at stake.  Unfortunately, it is also at this time when the risks to retirement objectives are at their most threatening because there is (potentially) more to lose.

Retirement Risk Zone

So, if there is a lot at stake, it is important to understand ways to help secure your retirement by understanding the key factors underpinning it.   Whether you run-out-of-money or not in retirement principally depends on:

1. How long you live.  Find the answer here 😉
2. How you invest your money and how much the investments earn.
3. How much you draw from your investments.

In this section, to help with the final point above, we analyse some in-depth research conducted in 2014, covering investment returns over 112 years to try to determine what a ‘safe’ amount to withdraw from your super is. 

What is a safe amount to withdraw from super?

Researchers have identified the maximum withdrawal rate that ensures portfolio survivability based on long-term, historical averages.  That is, the maximum annual amount you can withdraw to ensure you don’t run out of money.  

In the following table, annual withdrawal rates ranging from 1 per cent through 10 per cent are considered across investment horizons of 10, 20, 30, and 40 years. The annualised returns data includes a 1.57% pa after inflation return on defensive (fixed income) assets and 7.22% pa after inflation return for Australian shares.  The table is an attempt to show the likelihood of a 50:50 Growth / Defensive portfolio of Australian investments supporting pension payment percentages over time:

The results highlight some important points:

• The longer your timeframe for investment (the longer you live and need income) the greater the likelihood you will run out of money.  For instance, given the investment return profile, if you draw 10% of your super balance every year for 40years you’re a 99% chance to run out of money.
• The more you withdraw, the greater the chances are you will run out of money.  If you draw 5% from your super, for 20 years, according to historical investment returns as outlined you are only a 12% chance to run out of money.  However, if you draw 7% the chance of running out of money jumps to 47%.

Given the Government legislated minimum payment requirement for a 65-year-old is 5% per annum.  Even with the exceptional performance of the Australian share market over the last century, a 5 per cent withdrawal rate with a 50:50 growth/defensive asset allocation is associated with a 40 per cent chance of a client’s portfolio being fully depleted after 30 years (results circled).

Sure, 30 years is a long time, but given that Australians are living longer (and many Australians retire before 65 years of age), it is important to include the 30 and 40-year horizons to provide positive insights into the robustness of safe withdrawal rates across longer horizons.

Whilst not provided in this article, the research also highlights that you can improve the likelihood of not running out of money by taking more risk with your investment by owning more growth-oriented assets, like Australian shares. In so doing, this may allow you to draw a higher percentage of your super balance.  However, whilst there might be a very real temptation to look for higher returns in more risky assets you are potentially exposed to more volatility and sleepless nights. 

Ensuring portfolio survival

The practical takeaways from this research are the dynamic nature of retiree issues and the need to regularly review your situation with a specialist. Things like withdrawal rates; asset allocation; health issues; fees; tax management; scenario testing; and risk management are all important weapons to assist retirees in managing and mitigating the risk of running out of money. 

In a world currently providing retirees (and investors more generally) with significant headwinds (low risk investments offering low returns; the constant tinkering of superannuation policy; and our seemingly ever-increasing longevity), there is a growing need for Australians to consider the appropriateness of their retirement plans.  

Where to from here?

Like most things in life, your plans should not be ‘set-and-forget’, there are trade-offs to consider with your investment and spending decisions, the information discussed in this article is only part of the plan.  To assess how this information relates to your situation, speak with a retirement planning specialist.  Once you find comfort in the plan you set out, they might even be able to help you answer the next question:   What is worse?  Running out of money OR not having spent it all.