Drawing the right level of income from your super

How much you should really draw as an income from your superannuation?

When you hit retirement age, you have the ability to access your superannuation and draw an annual income stream. Once you are fully retired, you have the ability to select how much you want to take from your superannuation—and making the right decision is critical.

So, what is the right amount of income to draw, and are there any consequences of drawing higher amounts in retirement?

Let’s imagine you’re 65 years old and fully retired. You have started an income stream, so each year you are required by law to draw a minimum amount of 5% of your super balance.

Although the minimum drawdown is 5%, you do have the choice to take out a higher amount if you wish, say 7 or 10%. But if you choose to draw a higher amount, what are the consequences? Does it really make a difference to your long-term retirement plans if you draw even just 1% extra?

The biggest concern with taking a higher amount is the risk you might not have a super balance left before you die. Potentially, this leaves you 100% reliant on government support and financially vulnerable in your later years.

A 2014 research report by Griffith University’s Michael Drew and Adam Walk for the Financial Services Institute of Australasia, How Safe are Safe Withdrawal Rates in Retirement? An Australian Perspective, explored this very point. The study is interesting because there are three variables that have a massive impact on the outcome:

• the mix of assets between growth-based assets to defensive-based assets

• the length of time you live

• the percentage of drawdown taken.

For example, if you’re a balanced investor who decides to take 5% and you live for 30 years after retirement, you have a 60% chance of still having funds at the end of your life.

If you increase this by just 1% to a 6% drawdown, the probability drops to 37%.

Equally, if this 6% drawdown is taken and you only live 20 years after retirement, then you have a 67% probability. 

Now, there are many variables in this analysis; the rate of return can vastly change the outcome. Moreover, your exact date of death is unknown, yet it can have a significant impact on the final outcome.

However, what is important is to understand the variables at play with each one of these choices that you might decide.

The other problem that arises with the superannuation environment is that as you age, your minimum drawdown rate increases. So by the time you reach 80, you might be required to take 7% as a pension payment. This doesn’t mean you have to spend all this money, but it is important that as you reach these higher levels you are cautious, as the probability of retaining a super balance for life drops dramatically.

Please also remember that before embarking on any investment decision, you should always seek professional guidance from a licensed financial planner. Of course, I recommend AJ Financial Planning.