Working age Australians are encouraged to grow their superannuation to enjoy a rewarding retirement. But new research shows many retirees could be denying themselves a fulfilling retirement by avoiding dipping into their nest egg more than absolutely necessary.
A study by the CSIRO found retirees with more than $100,000 in super typically use their nest egg to invest in an account-based pension (or allocated pension). These are a tax-friendly option, and they work a bit like a managed fund. You can choose the underlying investments in line with your views about risk, and the pension pays a regular income stream in much the same way as a wage or salary.
A key feature of allocated pensions is that each year you need to choose the size of your annual withdrawals – or “drawdowns”.
Minimum drawdowns apply in order to qualify for a tax exemption on investment earnings. For instance, if you’re aged 65-74 you need to withdraw at least 5% of your balance each year, rising to 14% if you’re aged 95-plus. Beyond these limits you’re free to withdraw as much as you choose.
Interestingly, the CSIRO found most retirees stick close to the minimum allowable drawdown. Only one in four withdraw more than twice the minimum. Coupled with relatively strong investment returns, this has meant most retirees using an allocated pension have seen the balance of their nest egg increase in recent years.
There are a few reasons why people may opt for the minimum withdrawal. One boils down to behavioural science – it can be hard choosing how much money to take out annually, so it’s easier to simply go with the minimum, which is set in stone.
Retirees may also be concerned about outliving their retirement savings, and so take a conservative approach. If you don’t have much in super, that makes sense.
Nonetheless, the study concluded that many of these retirees will pass away with substantial amounts of their nest egg unspent.
I realise that after a working life looking on super as a form of saving and investing, it can involve a radical change in mindset to see your super as a source of funds for spending. The things is, having worked hard to accumulate super, it’s not unreasonable to reap the rewards in retirement rather than living an unnecessarily frugal lifestyle.
Something as simple as working out personal goals for the year ahead, and deciding how much income you’ll need to achieve them, can be a starting point to understanding how much you should drawdown from your super each year to enjoy a quality retirement.
I’m all for living within our means, and yes, it pays to be mindful of not exhausting your nest egg early on. But ultimately, your money is no good to you if you don’t let yourself enjoy it.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
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Choosing the right super investment options at the right time could make a difference to how much money you have when you retire.