New research by Morningstar suggests Australian retirees can only afford to withdraw 2.5 per cent of their allocated pension each year if they want to be certain it will last for 30 years.
A new Morningstar paper titled Safe Withdrawal Rates for Australian Retirees casts doubt on the ‘four per cent rule’ for pension withdrawals, popularised by US financial planner William Bengen in 1994.
The Morningstar paper concludes that financial advisers and retirees should use “lower initial safe withdrawal rates than noted in prior research”.
“The lower end of the range now starts towards 2.5 per cent and not the previous four per cent,” it said.
The findings have ramifications for the minimum annual payment that account-based pensions are required to make to beneficiaries.
Currently, account-based pensions must pay four per cent per year to beneficiaries aged under 65; five per cent a year to beneficiaries aged between 65 and 74; and six per cent to beneficiaries aged between 75 and 79.
Presenting the paper in Sydney, Anthony Serhan, Morningstar’s managing director for research strategy in Asia Pacific, said the Turnbull government should review minimum withdrawal rates.
Any review of the rules should take into account the fact that equity return expectations have been “reset” in recent years, Mr Serhan said – as well as the fact that life expectancy is steadily increasing.
“Under current law, account-based pensions aren’t an estate planning tool. They’re meant to pay you a pension which you either spend, or you can reinvest in a normal environment,” Mr Serhan said.
It is also perfectly reasonable for the government to want to limit the amount of money that remains in the tax-incentivised environment of superannuation, he said.
“[But] there is a trade-off. You can force people to take out a higher minimum level, but the trade-off there is you’re also increasing the probability that they are going to need the age pension sooner at some point,” Mr Serhan said.
“And based on our analysis and our projections moving forward, these rates are going to diminish capital more quickly than what we would say is the safe withdrawal rate,” he said.
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The first point is well made Jimmy, but it is one we need to help people understand in the context of their retirement planning. For some it will sound odd to use part of their allocated pension payments to build a separate investment pool, but it will be exactly the right thing to do for some people.
One of the things our paper tries to do is help people understand the trade-offs and choices they can make.
It isn’t meant to last in super forever. And just because people have to draw down more than they may need, doesn’t mean they need to spend it. It can go into investments outside of super.
And then they can also sell their home, downsize and free up capital. Times will come when you will be unable to access an age pension when you are sitting on a massive capital asset that doesn’t produce any income. Our stay at home and any pension payments received will need to be repaid from the deceased’s estate if you decide that staying is more important.