A research report, How Safe are Safe Withdrawal Rates in Retirement? An Australian Perspective, provides new evidence that the four per cent golden rule of retirement is too optimistic.
The current withdrawal rates are four per cent for those under 65, five per cent for those between 65 and 74, and 14 per cent for retirees over 95.
“Even with the exceptional performance of the Australian stock market over the last century, a four per cent withdrawal rate over 30 years on a 50:50 growth/defensive asset allocation is associated with a 20 per cent chance of financial ruin,” Finsia chief executive and managing director Russell Thomas said.
Authored by Professor Michael Drew and Dr Adam Walk, the report finds that the much celebrated four per cent rule has become a popular heuristic that has provided a quick shortcut to ‘solving’ this most difficult of retirement planning problems.
“The study finds that there is one key ‘known unknown’ in the debate – the ordering, sequencing or path dependency of returns,” it said.
Colonial First State surveyed 200 of its top advisers on its First Choice pension product to find out what they thought of the current withdrawal rate of four per cent per annum.
One adviser surveyed said the minimum should be whatever the client needs.
“If the government is going to change the deductible amount for Centrelink income test purposes and start dealing the money, they should then allow clients to take out what they actually need, rather than have this dictated to them,” he said.
Speaking at the results lunch last week, Colonial First State general manager, advocacy and retirement, Nicolette Rubinsztein said the current four per cent annual withdrawal rate is not as safe as many would have thought.
“The government are trying to avoid people using their super as a tax avoidance vehicle and using large amounts,” Ms Rubinsztein said.
“It is very much a balancing act of trying to get them low enough that they last for increasingly long periods of time in retirement, as people are living longer, but high enough so they are not used for estate planning purposes,” she said.
The survey found 96 per cent of surveyed respondents said they had clients affected by these minimum withdrawal amounts.
“In other words, those clients are being forced to take more income than they actually want to live on,” Ms Rubinsztein said.
“On average, a third of clients have issues with the withdrawal amounts,” she said.
Asked whether they would accept a reduction of the 4 per cent rate, 97 per cent of surveyed advisers were in favour of a reduction; 49 per cent of them – a vast majority – said two per cent would be the right level.