From saving to spending: Don’t get caught out

Some government reports can be as dry as dust, particularly those covering the finer points of superannuation legislation. The good news is that members of our team at Retirement Essentials read all the reports and legislation changes so you don’t have to! But to our surprise, a recent discussion paper released by Treasury on the Retirement Phase of Superannuation’ is far from dull. It’s written in an accessible style and we’ve learned a lot about how the government views superannuation and how it’s working (or not) for ordinary Australians. 

Retirement Essentials’ director, Jeremy Duffield is responding to the Treasury call for ideas on how to improve this aspect of retirement income and we’ll share Jeremy’s insights with you when they are available. But meanwhile one of the most important points highlighted in this discussion paper was the way that many retirees view and respond to the government mandated superannuation withdrawal rates. Let’s begin with a refresher on how these rates are set.

Minimum super drawdowns

The minimum amounts are set by the Australian Government on accounts which have moved to spending phase, i.e. a retirement income stream (usually an Account-Based Pension). The legislated minimum annual payments for super income streams run within a financial year. They are applicable to pensions or annuities that have been commenced on or after 1 July 2007. Superannuation and annuity providers calculate this minimum annual payment on 1 July each year, based on the account balance of the member or annuitant. 

There is no maximum withdrawal amount. (There is an exception, however, for those retirees using a Transition to Retirement strategy.)

The stated reason for the need for retirees to withdraw their age-related minimum amount is to ensure that retirement savings, in the form of superannuation, are used to fund retirements and not just saved as potential bequests for the families of the retirees. 

You may recall that, for retirees with retirement income streams, the minimum amounts were halved during the years of the Covid pandemic. That was to assist retirees who had little chance to spend the full minimum, due to reduced economic opportunity and extensive lockdowns. These rates reverted to their normal levels last July as shown in the table below. 

Age on 1 JulyNew (standard) minimum drawdown rates from 1 July 2023
95 or over14%

Where’s the problem?

The difficulty lies in the interpretation of minimum withdrawals. According to the Treasury discussion paper, many retirees believe these minimum rates are actually recommended by the government. They are not. They are a requirement to ensure that super, at least partially, helps to fund older Australians’ retirements. 

‘Their purpose is to ensure that retirement savings receiving an earnings tax exemption are used appropriately for retirement income purposes’. Says Treasury.

But many retirees will need more money to lead a reasonable life in retirement. As the paper also noted:

‘Minimum drawdown rates are generic settings which are not designed for, and do not lead to an optimal retirement income for all retirees.’ 

The government suggests that retirees’ reluctance to spend more than these minimum amounts may also be linked to the need for more flexible retirement income stream products. Put simply, better designed retirement income products might encourage retirees to comfortably withdraw larger amounts. Additionally, after years and years of being told to ‘save’ for retirement, spending more than the minimum drawdown rate may seem to many older Australians like spending too much. 

Another anomaly is that the drawdown rates are age-based. So the minimum amount is set for those aged 60-64 at 4%, whilst the higher levels of 9-14% are set for those aged 85 and over who will tend to have fewer years of retirement ahead of them. This may work for the government’s tax equity aims. But it does not correlate with well-documented phases of retirement when the early years tend to be more active, aspirational and higher spending, and the later years are generally associated with reduced expenditure.

How to set your own optimal drawdown rate?

Because Minimum Drawdown Rates are not a recommendation but guidance only, if you don’t need the minimum to live on, you can bank it or reinvest it. If you need more, as there is no maximum rate, you can withdraw more – your entire balance if necessary. These drawdown rates are there to ensure you won’t underfund yourself in retirement. Decisions about how much super to withdraw, in addition to your age-specific rate, will require consideration of all your possible sources of income, including:

  • any Age Pension entitlement, 
  • other investments and 
  • work income. 

It will help to have as thorough an understanding as possible about your super and your anticipated expenditure in order to ensure your super is working as hard as possible. Speaking with an adviser to learn more about super is a great start. So too is comparing different levels of withdrawals and running them through the Retirement Essentials safe spending simulator. It’s a really helpful way to better understand your spending options across the course of your retirement journey.

What do you think?

Do you find these mandated rates useful? Or unrealistic? If you don’t find them helpful, how much would you suggest as a minimum?