One of the more interesting aspects of Australian superannuation is that retirees are forced to draw down a minimum amount every year after they retire.
Many retirees get upset about the idea of diminishing their nest egg over time after switching their super to the decumulation phase but the whole idea of superannuation is to provide a regular income in retirement and the mandatory drawdowns are designed to make sure that happens, depending on how long you live.
There is another way of looking at the minimum drawdown amount as well: seeing it as more of an investment challenge rather than a burden.
This is a positive way of thinking about your super and particularly in the early years of retirement, I believe it's an achievable challenge that can result in your balance continuing to rise even as you are drawing down more money to live on each year.
Beating 5% p.a. Achievable
For many people the really important years are the earlier ones in retirement when the challenge of meeting and exceeding the mandatory drawdown is quite achievable, given that the Australian share market return (capital growth plus dividends) averages above 9% a year.
To start, the first run of the mandatory drawdown – which is 4% of your super total until you turn 65 – should be readily achievable with the account still capable of growing.
There may occasionally be years of poor performance when the account goes backwards, but in general a well-run superannuation account should be able to return greater than 4% under most circumstances.
Things get a bit more challenging from 65 up until 75, when the minimum drawdown rises to 5%.
Given that most superannuation accounts run by a fund manager or self-managed would require a fairly large cash component to meet ongoing withdrawals and to prevent having to sell shares and other investments at times of financial stress, returning more than 5% becomes more difficult using just the remaining invested capital.
Conservative Settings Make it Hard
Those with conservative settings on their superannuation investment will particularly struggle to make the 5% hurdle and keep the fund growing.
That said, those with the stomach for the greater volatility and returns produced by growth or high growth settings for the bulk of their invested capital should still be able to grow the fund in a majority of the years.
Where things get really interesting Is from the years 74 to 79, when the minimum drawdown rate hits 6%—which is enough to act as a real challenge for your inner fund manager, or actual super manager.
From there on the task gets increasingly harder, rising to a 7% minimum drawdown from 80 to 84, 9% from 85 to 89, 11% from 90 to 94, and an uber-challenging 14% a year from the age of 95 upwards.
Of course, difficult is not the same as impossible, and—being an ornery contrarian—I get quite the buzz out of imagining my future 96-year-old self slowly dancing in celebration around the kitchen having outperformed my mandatory drawdown limit for the past year.
Apart from such fantasies, the important thing to remember here is that as you get older much more of your investments will be held outside of super as the mandatory drawdowns get bigger.
That depends, of course, on living expenses, with care and health costs often ramping up with greater age.
Spending Not Compulsory
It is important to remember that there is never any compulsion to spend all of the mandatory super drawdowns, and building up investments outside super is an important and sensible outcome for most people over time.
Holding more assets outside of superannuation means that the amount of cash within the fund could be reduced a little with assets sold progressively, although it is still probably a good idea to put aside enough cash to meet the mandatory drawdowns each year.
For those not managing their own super, the cash to meet mandatory drawdowns will be managed automatically, although there is nothing to stop you moving your super funds up the risk/return scale a little over time, particularly if you have sufficient assets to meet your living needs outside of super and have passed the hump of worrying about sequencing risk.
Naturally, personal circumstances are absolutely unique and it is important not to make hard and fast rules across the board.
However, investment psychology is also very important and, particularly in the early years of retirement up to age 75, I think it is a great aim to try to grow your super account each year despite the regular drawdowns.
From there on the task gets much tougher but who knows, perhaps the challenge of at least trying to overcome an increasingly difficult financial hurdle might be just what the doctor ordered to keep things interesting in your twilight years.
