Nicolette Rubinsztein
A group of Australian actuaries have devised a simple ‘rule of thumb’ to help retirees work out how much money they should draw out of their savings in retirement.
The five actuaries ran a range of complicated equations and dynamic programming calculations to help single retirees who have reached Age Pension eligibility age, and who are receiving a part or full Age Pension but who choose not to seek financial advice at retirement.
Actuaries Institute President Nicolette Rubinsztein said many people can have a better retirement if they have higher confidence that they are able to draw down a little bit more of their savings than the minimum required by the government. “Many retirees draw a bare minimum from their account-based pensions, or their savings, after they stop work,” she 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.”
Actuaries Institute Chief Executive, Elayne Grace, said: “Excellent techniques for computing optimal spending for individuals are available but these are complex. It has not been possible to find drawdown rules that are simple and optimal for everyone,” she said. “But the Working Group has developed a guide that could help Australians have a better retirement. All the rules respond to Age Pension testing parameters, which makes this work very important for a large number of Australians.”
Having done detailed calculations, the team of actuaries produced simplified guidance for pensioners who want an easy-to-follow rule. For many combinations of age and asset level, the simplified rules produce suggested rates of drawdown that are reasonably close to the optimal rate derived from the very detailed calculations.
The simplest ‘rule of thumb’ guide is that a single retiree should:
- draw down a baseline rate, as a percentage, that is the first digit of their age
- add 2% if their account balance is between $250,000 and $500,000
- the above is subject to meeting the statutory minimum drawdown rule.
For example, here’s what a single retiree, who retires with a superannuation balance of $350,000, could drawdown. The rule of thumb suggests that a retiree aged 60 to 69, would draw down 8% of their savings: 6% representing their decennial age, plus an extra 2%.
“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,” said John De Ravin, one of the actuaries who devised the simple ‘rule of thumb’.
Mr De Ravin said even if post-retirement products are developed, the current expectation is that typically, only 25% of someone’s balance would be invested in an annuity. “If that is the case, then 75% of a typical retirement product will still require a decision by the retiree as to how much of their account-based pension component to draw down,” he said.