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This is a frequently asked question in the financial planning world and one that is very difficult to answer simply. As with almost all financial planning matters, there is no one size fits all and the remedy is always specific to the individual/couple. However, we can still consider the question generically and look at how government legislation regarding the “minimum drawdown %’s” for account-based pensions can question the sustainability for those over 65 and even more so for those aged over 75 and beyond.
In 1994, William Bengen produced a theory based on drawing an income from a pension account for a minimum of 30 years. Stating a safe withdrawal rate was 4% in the first year and then increasing this $ amount by the rate of inflation each year thereafter. This is commonly referred to as the 4% rule or “the golden rule”. The general premise is that your funds (assuming a balanced portfolio) should return around 7%, 4% of which drawn as an income and 3% caters for inflation.
This makes some big assumptions:
- The main assumption it makes is that people want to leave a significant amount of their Super to their children rather than gradually run down the balance. The more common response I hear from Hudson members is that “The Super is ours, the house is for the kids”
- Implication: This would suggest one could “safely” draw slightly more than 4% and slowly run down the nominal balance.
- It also assumes no entitlements to the Age Pension. Even after the changes on 1st January, a couple that own their own home, your Super balance falls your Age Pension entitlement rises (assuming you are spending what you draw out).
- Implication: As one heads further into retirement, the amount you need to draw may decline. Furthermore, there is an argument to draw more earlier on in retirement and less as your Aged Pension entitlement rises.
- Finally, it does not take in to account how expenditure needs change across retirement. Put simply, the older you get, the less you tend to spend. Earlier on in the retirement, people are far more active.. They also tend to travel more, knowing they may not be able to later in life as health may not permit it.
- Implication: Once again it suggests one should perhaps draw more earlier on in retirement and less as time progresses.
Additionally, there is also the Government legislation regarding how much you must draw from your pension each year. It works as follows:
|Age Bracket||Minimum Drawdown Rate|
|65 – 74||5%|
|75 – 79||6%|
|80 – 84||7%|
|85 – 89||9%|
|90 – 94||11%|
|95 and Over||14%|
This shows how those that retire at 65 are not even legally permitted to draw 4%, as per the “Golden Rule.” Furthermore, it forces someone who is, say 85 years of age, to draw 9% of their pension. This individual may well live another 15 or 20 years, but they are forced to draw nearly 10% of their retirement funds each year.
As stated previously, there really is a range of factors that can influence how much you should draw from your Super/Pension funds; from estate planning considerations, Centrelink entitlements and expected expenditure needs. A simple solution could be to draw the minimum the Government allows and perhaps increase this when needs dictate, effectively playing it by ear, and then reassessing your position annually to see how much you have drawn and to consider sustainability.