Retirees should draw down a percentage of their superannuation balance each year that is equivalent to the first number of their age, according to a group of actuaries who claim the model is very close to the optimal pension drawdown rate for retirees.
The five actuaries – John De Ravin, Estelle Liu, Rein van Rooyen, Paul Scully and Shang Wu – who are members of the Actuaries Institute, developed the ‘rule of thumb’ using a series of equations and calculations to help single retirees who have reached age pension eligibility age, and who are receiving a part or full age pension, but who did not seek advice, work out how much money they should draw out of their savings in retirement.
The group said the simplest guide was that a single retiree should draw down a baseline rate, as a percentage, that is the first digit of their age and add 2 per cent if their account balance was between $250,000 and $500,000, subject to meeting the statutory minimum drawdown rule.
In an example provided by the institute, a retiree aged between 60 and 69 and with a superannuation balance of $350,000 would draw down 6 per cent based on their age, and an extra 2 per cent, for a total annual drawdown of $28,000, or 8 per cent of $350,000.
The institute stated the rule is a simplified model of the detailed calculations for an optimal drawdown for single homeowner pensioners that would promote the best possible lifestyle for the retiree, and allowed for the age pension that would be payable to a pensioner with reference to their assets.
“The majority of Australians are members of defined contribution superannuation schemes and on retirement they apply the balance of their account to start an account-based pension, but it is very hard for retirees, who are generally risk averse, to work out how much of their savings they should live off at any point in time,” De Ravin said.
“The federal government has encouraged the industry to develop better products to help ensure retirees don’t outlive their spending. But that’s still a way off. In the meantime, we’ve taken a complicated set of equations and scenarios, and worked out what is a simple guideline that works.”
Institute president Nicolette Rubinsztein said many people could have a better retirement if they were confident of the amount they were able to draw down each year.
“Many retirees draw a bare minimum from their account-based pensions, or their savings, after they stop work,” Rubinsztein said.
“They can’t afford to pay for professional advice from a planner and they live frugal lives because they fear outliving their savings. But the ‘rule of thumb’ is simple and accurate and takes into consideration a retiree’s asset base and age.”
The group has also developed a set of recommendations for retirees who actively manage their finances, and a set for financial planners working with retiree clients, which use greater detail around ages and asset bases to calculate an appropriate drawdown rate.