Making sense of pension drawdown strategies

In this video interview we’re diving into one of the most important – yet often overlooked – parts of retirement planning: how to actually draw down your super and other savings.

It’s not just about how much you’ve saved – it’s about how you use it. That’s where a drawdown strategy comes in.

Joining us is Geoff Warren, Associate Professor at ANU, who has done extensive research in this area and will help us unpack the key ideas from a recent explainer published by The Conexus Institute.

Our discussion explores what a drawdown strategy is, why it matters, the different approaches you can take, and how to align your plan with your personal goals and lifestyle.

Transcript

Robert Barnes

At SuperGuide, we often hear from readers who feel confident about growing their super but are unsure what to do once they retire. How do you turn your savings into reliable income? How much can you safely spend each year? And how do you avoid running out or being too cautious and not enjoying your money?

To help answer these questions, we’re joined by Professor Geoff Warren, a leading researcher in retirement strategies at the Australian National University. Geoff is also a research fellow at the Conexus Institute, where he has done extensive work on how retirees can manage their super in retirement, especially through what’s known as drawdown strategies. In this interview, we’ll unpack what drawdown strategies are, how they relate to different retirement goals, and what practical steps you can take to build a plan that suits your lifestyle and financial needs.

Welcome, Geoff.

Geoff Warren

Hello, Robert. How are you?

Robert Barnes

I’m very well. Thank you for joining us. The phrase drawdown strategy will be new to many people. What exactly does it mean and why is it important that retirees consider one?

Geoff Warren

A drawdown strategy is pretty simple. It’s just how much money you take out of the assets you’ve saved for retirement to turn it into income to spend. In the context of a super fund, it’s usually the amount you decide to take out of account-based pension or your retirement savings with super. What that would do in that context is it would be shaping up the income stream, noting it could also be occurring with income coming from other sources. It’s very simply that, but it also has another implication.

It’s not just creating income, but what can happen is the amount of money you take out of your super retirement savings is then going to impact how much is left over for you to use at other times. It has an impact on your flexible access to the available funds. But it’s very much central to how our retirement savings are going to be deployed. When you get your retirement savings, you need to do two things.

One is allocate them into assets or maybe other ways of investing. The second  is you have to decide what pattern that you take the money out in to generate that income for spending.

Robert Barnes

Your research outlines different drawdown strategies. Can you briefly outline some of the most common ones?

Geoff Warren

We might just go to this slide, and I’ve listed some here, and I’m going to walk through these. What we’re going to do is give you a sense of what each of them means. But it’s really the first three that I’m going to spend a little bit more time on because I think they have real practical application for that for retirees.

The very first is the Minimum drawdown rule. They’re set by the government. That’s a minimum amount that you have to take out of your retirement account or your account-based pension. We’ll talk about those in a moment, but they, in a way, set a floor. But for many, it actually works out to be a default because if you don’t specify what you’re going to do to take income, you end up… The super fund will actually apply the minimum drawdown rules, and that’s what you’ll get.

A second one is what I’d call is Draw to target. That means you have a specific amount of income that you want to draw or you want to secure each year, each month, whatever you’re drawing. That means you’re drawing enough to get to that target income. What that does is it accords with what we call an income target objective. So your goal is to actually target a certain amount of income. This is a drawdown strategy designed to get you there.

The third I’m going to call Affordable drawdown rates. What that is, is it’s a percentage you draw. This is not a dollar amount, but a percentage that you draw from your savings that you think can be affordable. And affordable, it’s a little bit tricky here to describe this, so I’m going to unpack it a little bit first before showing later what it actually means. It’s affordable in the sense you can afford to draw this amount and still have a good chance of your assets lasting through a good part into retirement, if not all the way through retirement, taking into account that you also expect to get investment returns in the future. And those investment returns are uncertain. You don’t know what returns you’re going to get.

What you’re trying to do is optimise the income you take out to manage your glide path through retirement to balance the risk that you might live longer than expected and the risk that the investment returns may be not what you expect. That’s a little bit trickier, but they actually aren’t that complicated because what it can be expressed in is just a schedule of the percentage you might draw each year. We’ll talk about later how you might implement that. That’s going to be difficult. But in theory, that’s the way that it happens.

Robert Barnes

I’m presuming that in Australia, the top one is probably the most common one that you see. I guess there’s a misassumption that it’s a recommended amount or a suggested amount, at least, because it’s a minimum amount. But do you have any insight in Australia, which of these strategies are most commonly used?

Geoff Warren

If I think it’s the first two we see. The minimum drawdown rules definitely, maybe at least half, 60% of people perhaps use that. There can be a range of reasons why they will do that. One is it is the default. If you look at the most superannuation fund forms, it sits at the top. They’re putting it up. 80% of super funds are putting it up as the first one that you see, and hence you might be inclined to choose that. There is this idea that some people view it as this recommendation by the government. There’s a whole range of reasons. Some maybe are even want to take a lot of money out of their super, they want to leave it there, so they choose the minimum. There’s a range of reasons why that occurs.

The problem is that it’s quite often inefficient in the sense that it can lead to underdrawing on your retirement savings. As a consequence, you don’t end up spending them. As the quip goes, you could die the richest person in the graveyard, for instance. Maybe that’s not the best outcome. They’re not generally recognised as the most efficient strategy, the best strategy, but they’re readily available, so people take them up.

The draw to target, you see that if you talked about ASFA Comfortable, one of the Super Consumers Australian standards, if you were looking at that, or replacement rates is another thing, they’re all specifying an amount of income you should draw, and that’s draw to target. You do see them populating the system, and some of the super fund calculators, for instance, are based around the ASFA standard, such as ASFA Comfortable. If you went on to ASIC Moneysmart, it would generate the outcome in terms of a target level of income. That, to me, is sitting in the draw to target space. Whereas, affordable drawdowns look more like the minimum drawdown rules, but the percentages are different.

Robert Barnes

I guess if people are just drawing the minimum and their returns in pension might be 8, 9%, they will end up with more super than what they started with when they started retirement.

Geoff Warren

Exactly. Exactly. That’s what the government’s Retirement Income Review of 2020 found that a lot of people, or maybe more than a half people, end up dying with more money than they started. Whether that means they made best use of their savings, well, that’s questionable. Maybe that was intentional, maybe it wasn’t. But if you don’t want to leave a big request, you need to design a drawdown strategy that will make sure you make best use of your funds.

Robert Barnes

Could you unpack just briefly some of the other drawdown strategies we can see here?

Geoff Warren

Sure, no problem. Constant real amount is that you set amount at the point of retirement that you say you want to draw, and then you draw that amount adjusted for inflation. It’s very similar to the draw to target strategy, but the difference is it’s usually based around the percentage of your retirement balance at retirement. It’s widely… This is actually the dominant drawdown strategy in the US. It’s known as the 4% rule. Start drawing 4% of your initial balance, then keep drawing it, adjust that amount adjusted for inflation. We don’t see that in Australia, that particular approach, or we rarely see that, but that’s out there in the US. I think it’s a variation. As I said, of draw the target. It just has a target determined a different way.

Dynamic rules are really a set of rules to say, let’s draw a certain amount and then adjust it depending on the investment returns based on some rules. There’s many variations of this, but one might be that it might be used in conjunction with a bucketing strategy where you put a certain amount aside in a bucket to deliver near term income, and then you have these rules for topping up that bucket depending on the investment returns. Then you vary how much you top it up depending on whether the investment returns are poor or they’re good.

That then can impact on the amount you draw over time such that if you suffer bad investment returns for a while and your income bucket runs out, there’s these rules to say, Oh, maybe we shouldn’t be topping it up now, and maybe we need to cut back income. Or rules to say if investment returns are better than expected, can be topped up. There’s many variations of that. In fact, the academic literature in the US is full of different rules of this type of nature.

A hybrid, I would describe as aligning with the baseline plus aspirational type of income objective. Why call it a hybrid? Because there is a target. The target is to make sure you draw a baseline amount, the minimum amount you need to, say, your regular living standards, and then the rest you treat as like, All right, I can take a bit of risk with that. I can have a bit of flexibility. That’s the aspirational component, and you would draw them differently. So you definitely make sure you lock in the minimal amount. Then you would go from there and decide what rules you require around the aspirational element and both in the way you invest it and the way you draw down on it.

Then finally, I’m just going to mention Full scale dynamic optimisation. If that’s a mouthful, it is because it’s an academic term and you never see it used in practise because it’s just too complex. I’m just putting it there for completeness. But we might be able to drill down to the first three, a little bit more as I think they’re the relevant ones here.

Robert Barnes

This final one, the full scale dynamic optimisation, is that a best practise in terms of it gets you the best results, but it’s just too complex to implement?

Geoff Warren

Yes. Yes, it’s like you rerun your model every period, depending on what’s happened, the investment returns and your life expectancy. Actually, the affordable drawdown strategy is a simplification that says, We’re just going to apply these percentages throughout. But what would happen is if you’re running full scale dynamic optimisation, the percentage you drew would vary over time depending on experience.

Robert Barnes

I guess for a retiree, Who might be bamboozled at this stage. I guess a key part of it is just knowing what you understand, what you can actually understand and implement for your own goals.

Geoff Warren

I couldn’t agree more. I think when we get to the end, let’s talk about how we implement this. To some extent, what I’m doing here is setting out the landscape. I’m saying this is the theoretical base we’re operating with, the concepts we’re operating with, and then we can talk about how do you actually do it in practise. I have to say, unfortunately, the super industry is currently not doing a good job of making it easy for an individual working off their own bat without a financial advisor to implement.

Robert Barnes

How do these different strategies relate to different retirement goals?

Geoff Warren

Well, the minimum drawdown rules and the affordable drawdown rates do work towards trying to optimise your income. I’m not going to put minimum draw down the rules in there. They’re very similar nature. They’re just not the most optimal percentage rate. While making sure that you always have some money left over because they’re a percentage rate. You can’t draw 100% of your money down if you’re drawing a percentage. They cater to that.

What happens is that then you… Because it’s a percentage, and if it’s a fixed percentage, what will happen is your investment returns fluctuate, your values drawn will go up and down. I might go into some slides here to just illustrate it. This is the minimum drawdown rules. What they do is they start off at 4% up to about age 65, and then they step up over time, for instance, and get to a 14% by the time you’re at age, late ’90s into the rest of your life. Now, you might say, Oh, we’re drawing more and more. But remember what’s happening here in the background is you’re also been drawing down, so your account balance is going down as well. The amount of income you draw on is hard to say.

If we move on to this, this is what a drawing for the minimum drawdown rules would look like. Now, what it delivers. First thing to note, let me just explain these charts so you can understand them. Firstly, the black line is what you’d expect to get, assuming you got the investment returns that you expected. What I might note about that is to see how it’s jagged, quite jagged and bumpy. The reason is because of that chart I showed you before. We’re stepping up the percentage, so it’s creating a jagged pattern.

The grey is a range, like a 90% range. You’re 90% sure that you’re going to sit somewhere in that range over time in your income. You can see they’re quite variable. This is designed so that down the bottom there is the age pension is somewhere the bottom of that chart, but you never quite get it. There’s always some income being drawn, even under bad experiences, but your income is going down over time. The other thing I’d note is I picked out one path. This is the range of things, the likelihood, likely outcome, and the range of things that could happen.

But when you live through this, you’re going to live through one specific set of investment returns. What happens is you’re going to get a random variation of income. You can see that blue line is just one particular series of sequence of returns, and you may notice the income bumps up and down and goes all over the place. What this says is, firstly, I’m going to say the minimum drawdown rules, they tend to maybe not be high enough early in retirement, so you tend to not spend enough earlier when you can, and there’s a chance there’ll be more left over at the end by the time you die, you don’t fully utilise your savings, which could be a problem unless you’re happy to leave funds behind.

It will generate volatile income, so it needs to be somebody who doesn’t want stable income, but has ability to tolerate some volatility in your income. It will also ensure some assets are always sitting in the account at the end of the day. It will suit somebody who has an objective to make sure they’re always got some funds they can access.

Let’s go to the affordable drawdown strategy. As I mentioned earlier, the doc points over the side to explain what’s going here. It’s a preset schedule of drawdown rates. They tend to increase with age. It looks like the minimum drawdown rules, percentages are different. They’re smoother and they’re a bit higher. You end up with variation over time depending on your investment returns. What you can see here is a much smoother chart of one that tends to be higher. You tend to get higher levels of income and a smoother level of income, but with a greater chance of, if you get poor investment, you get a bigger range. There’s more what percentage for income to range.

But you still get the characteristics that income is volatile. I’m going to pick out another chart here, another one sequence of events just to show the volatility, this is a different one to the prior chart. What is happening here is it’s very similar to the minimum drawdown rules, but the percentage you draw is better configurated, so you get more out of your savings. That’s the difference. You don’t have those bumps related to the minimum drawdown rules chunking up every 5-10 years.

Now, the other strategy is what I call a draw to target strategy. Let’s talk about that and how it fits with the income objectives. Just running through how it works. You set a target for your total income. You work out how much income is available from other sources, like the age pension, any lifetime income stream or annuities you might have in the mix. Not very prevalent these days, but as the super system moves forward, you’ll see more and more of these products being recommended to members.

That gives you a certain amount of income you’ve got. Then the aim is then to draw an amount from the account-based pension as required to top you up to the income target. What happens is you then keep on drawing under this formula until your account-based pension is exhausted, in which case the income will fall down to the baseline. The baseline will be whatever other income streams you have. It’ll be the age pension and any lifetime income streams you have in the mix or anything that’s outside the super.

Just looking at what that looks like, this is a similar chart where it’s got an expected outcome in a range. It’s got some assumptions there, but what happens here is that, again, the black line is what you’d expect to get. The red line is the target that we’re trying to hit in this case. In this case, it’s ASFA Comfortable, as it was a little while ago. A bit over $50,000. The black line says that you would expect to sustain ASFA Comfortable, depending on your investment returns, up until about age 90, approximately, and then you fall down to the age pension, which creates your floor.

The grey is again a range, and this will depend on investment returns. If you get bad returns, there’s a 10% chance that you end up on the age pension at age 83. If you get good investment returns, there’s a 10% chance that you might see it last to age 103. This little bit of dot up the top is the minimum drawdown rules coming into play where if you have good returns, you have to draw more than your target because the minimum drawdown rules tells you to do so. Let’s put that aside.

What objective would this pattern fit? Well, firstly, it would fit somebody who has a desire for a relatively stable amount of income. It would also fit somebody who doesn’t mind if their account-based pension or their retirement savings runs out at the end of the day, because that will happen in due course. In terms of the issue, before we were worried about getting a volatile income stream, now we’re facing income risk in terms of the risk of fluctuating income. Now we’ve got a different type of income risk, the risk of your balance running out and your income above the age pension running out. You have the risk of running out coming into play.

It’s really you don’t escape income risk, it just changes in form. The question, again, is what type of person are you? Are you somebody who’s happy to take some volatility in income on the notion that at least you keep you getting some income, but you don’t know how much, or are you somebody who just wants to draw a stable income for as long as they can, knowing that eventually, one day, what could happen is you’re going to run out of that asset in your super, and you’re going to run out of income from your super at that point.

Robert Barnes

So what factors should be considered to ensure the chosen strategy supports both essential spending and discretionary spending?

Geoff Warren

There’s a simple answer, and there’s a more complex and better answer here. The simple answer is just make sure you can draw enough from your super to maintain the income and the spending that you need to spend. That might require actually not only drawing that spending, but restricting your spending in order to make sure that you can pay for those essentials for a long enough period.

It would also have the consequence of meaning that you’re more likely to die with lots of assets intact because you’ve held back. Now, the better answer to this is that it’s not in the drawdown strategy to act to solve this problem, that there’s other ways of ensuring that minimum. The two other ways are rely on the age pension, which I think could be fine for most people who own their own home. Many people are in their own home and say, I could just live on the age pension. It won’t be great, but I’m not going to be left destitute. I’m willing to draw a bit more now and take that risk. The second answer is, there’s lifetime income streams or annuities. They’re a means of ensuring that you deliver some income for life.

They’re not really taken up by a lot of individuals these days, but there is a good argument that if you need a certain amount of income, that maybe you need to enter into that territory and look at lifetime income streams and annuities to guarantee you get that income. Then you could lock that in, and then you would say, I’m going to use the remainder of my savings to go for a little bit more growth investment, a little bit more income, even though it might be volatile, and the hope that I can do a bit better. The answer partly to this is not in just the drawdown strategy, but looking at how it fits together with the overall retirement solution.

Robert Barnes

Of course, we’ve got so many risks in retirement as well. How do drawdown strategies relate to some of the most notable ones? You mentioned risks of running out, income volatility, sequencing risk.

Geoff Warren

Yeah, they’re very central to all of these, particularly the first two, the risk of running out the income volatility. I already touched on income volatility in the sense that if you’re drawing a percentage amount or you’re having some dynamic strategies, they also fit in this way. You’re changing things over time, you’re going to end up with a more volatile income stream. But the other choice is to get rid of the volatility by drawing a fixed amount, in which case you could fall off the cliff at some stage if you end up with bad investment returns, keep on drawing that amount that you can’t afford and eventually your assets run out.

The risk of running out is an interesting one. Most people think, I don’t want to run out. I’m not going to run that risk. There can be a tendency to not spend because of that fear. I would encourage people to view this as a trade-off. That is, if you draw more income now, you’re more likely to enjoy it. But of course, the risk is that you’ll run out a bit later. But that’s a trade-off. You could decide to do that. I’d prefer to do that and run the risk of running out and take that trade-off rather than hold money back, fail to spend it, and die the richest person in the grave yard.

I just encourage people to view that as a trade-off. The trade-off here is the way it operates with drawdown strategies is the higher the drawdown, the more risk that you’re going to have lower income or run out of income later, whereas the more you would be sure to enjoy your savings now. Whereas the lower the drawdown, the more safer you are that your income will continue, but less you’re likely to enjoy your savings. That’s the trade-off you’re faced.

Finally, there’s sequencing risk, which is when you’re drawing funds down, you’re taking it out. If you get a bad sequence of returns and you take money out, you’re diminishing your balance quicker, and it’s more likely that you’ll have less assets there to generate income in future. The way that operates with drawdown knowledge is if you draw more, you’re more exposed to that risk, and if you draw a fixed amount, you’re more exposed to that risk. The reason is, is if you end up with a bad investment return and you’re drawing a certain amount, you keep drawing it, you’re drawing out a higher percentage of your balance. Whereas if you’re running to a percentage drawdown, like the minimum drawdown rules, when your balance goes down, so does the amount of income you draw. Therefore, it still has some sequencing risk impacts, but they’re much diluted when you’re drawing a percentage amount, that they automatically adjust downwards when you get a bad return.

Robert Barnes

Is sequencing risk only a risk really at the start of retirement, or is it throughout?

Geoff Warren

It’s more of a risk at the start of retirement. The general rule is it’s more of a risk when you have more money invested because that changes your balance more. What happens is at the start of the retirement, you have the maximum amount invested. A negative investment return at that point can have a larger impact. As you draw down your balance, the impact is diminished.

I would also caution people about worrying too much about dealing with sequencing risk. My analysis, it’s not a huge risk. It is a risk, but it’s not a huge risk in the overall scheme of things. Often the thing, the answer to get rid of sequencing risk is reducing the risk you’re taking, but that can also reduce your expected income. If you try to set out to address sequencing risk, what can happen is that the cost can be lower income overall. Just dealing with that alone and setting out to deal with that alone, I think is fraught. They could look at it within the whole picture as well.

Robert Barnes

In the bucket strategy, if people use a bucket strategy, does that minimise that sequencing risk or even get rid of it completely?

Geoff Warren

I don’t think it gets rid of it. Nothing gets rid of the fact that if you have a bad investment return, you can afford less income. Nothing changes there. What it does is it tweaks it at the margin from the financials perspective. More importantly, what it does is it gives people comfort from a more behavioural perspective. They feel like they’re able to absorb this risk because they have amount set aside. In a way, it’s a bit of a confidence trick on yourself. But I’m not saying that. That sounds disparaging, but I don’t view it disparagingly. I think it actually has a lot of benefit in terms of giving people comfort in doing bucketing strategies. I would actually be a supporter of them, not against it. But don’t you think that they changed the underlying financials.

Robert Barnes

How important is flexibility in a draw-down strategy and how can retirees adjust their plan in relation to changing circumstances?

Geoff Warren

I think flexibility is very, very important, actually, and to think about flexibility and how much you’re willing to exercise flexibility. There’s one very important reason about why the ability to exercise flexibility over the amount of income you draw is quite important. That is that if you’re willing to exercise flexibility, that is, you’re willing to say, I’ll cut back if need be. Not everybody can, but a lot a lot of people have that flexibility. What it allows you to do is draw more to start with and see how it goes. What that means, you draw more, you get a bad investment return, you’ve got to cut back. That’s not good. But just think about it, if you drew less to make sure your funds last and you end up with good investment returns, what ends up is you end up then just accumulating more assets which you don’t spend because you’re not adjusting upwards. You can have a cost there as well. If you got flexibility, you can start off drawing more income and see how it goes. The chances are by the end of your retirement, you would have drawn more income. But you are taking that risk of cutting back.

For those who have flexibility, I would say use it. Use it to draw more to start with. If you don’t have flexibility, then you’ve got to deal with that and insure it. If you need a certain amount of income, you got to look at making sure you’re locking the downside as well, and that should become a priority.

I would just make an aside here. There’s some research out there that comes out of the US that has to look at people’s behaviours. It strikes this issue about, do people want a stable income stream or do they exercise flexibility? What it tends to show is that people exercise flexibility. They spend the income they receive. That’s a dominant behaviour. This won’t be for everybody, but a lot of people spend the income they receive. They’re effectively exercising flexibility. That particularly applies to the discretionary element of their spending as against the basic needs. There has been the basic needs, but they’re willing to be flexible. This idea that you must have stable income, I think you got to think, do I really need stable income? Because if I need stable income, I run into other sorts of issues like I may not make the best use of my savings and so on.

The other consideration under flexibility is if you were running an income target, whether in fact you should view that as not set in stone and be willing to change it, I’d argue, yes, you should definitely be the case. Because You remember that chart we showed before with the income target and you’re falling off the cliff? That’s because you’re keeping the target where it is. Another response might be to have a target and to review it occasionally. If you’ve had a series of bad returns, you push your target down. If you have a series of good returns, you push your target up. That would be a form of what I call dynamic strategy, but I think it makes sense to just say, Just because I got a target to start with, let’s not lock it in and see this in a stone. Let’s every three to five years, say, is this appropriate? Or maybe after every big market move, should I change my target now?

Robert Barnes

I know we’re talking ideal world, but could you see what within the next 10 or so years, that super funds could actually tell you then whether you’re on target and that you could adjust and things like that. Do you know if super  funds are working on those calculations?

Geoff Warren

Super funds are actually working on these sort of issues at the moment. They’re, unfortunately, not as advanced as they should be on this. They can help you possibly work it out through some of their calculators as could other providers. It may be possible to work it out for yourself, but ideally, I’d like to see the super fund industry help members a lot more to manage their drawdown strategies and their income targets. For instance, very few super funds have budgeting tools on their website at the current time. It would be good to see more super funds with budgeting tools to help members work out how much they need to spend. It would be good for them to give some guidance based on what their income was prior to retirement, about what type of income you might expect now, and those things. I think they’re patchy within what the super fund’s offering at the time being.

Robert Barnes

Can you provide any other examples of how a retiree might modify their draw-down approach over time?

Geoff Warren

It depends on the type of draw-down approach you’ve got. If you’re drawing a given percentage, such as the minimum draw-down rules, so those affordable draw-down rates, in a It actually adjusts the income depending on the investment returns anyway. If you’re drawing a target income or trying to draw a certain amount, then I think in that case, it makes sense to review it occasionally. A third thing you might do is if you had a change in your life circumstances, you would probably go and then review what you’re doing at that stage, such as when your partner, unfortunately, passes away or you happen to have sold your home, for instance, a new downsize. All those things would trigger a review.

Robert Barnes

For someone approaching retirement, what steps should they take to develop and implement an effective drawdown strategy?

Geoff Warren

I’ll give an unfortunate answer. This is actually going to be quite tricky for individuals to do at the current time. I’m really hopeful that the super industry will move forward and give them a lot more assistance. One way of doing it is go to a financial advisor who can direct you, but then you’ve got to pay for it, and not everybody will want to do it.

Let’s talk about an individual who wants to do it by themselves, just looking some guidance and isn’t willing to pay for financial advice to hold their hand. The unfortunate thing at the moment is when you go through your super fund, most of them offer only two options for their drawdown strategies. There’s a few other additional ones we might talk about. The first is the minimum drawdown rules, which usually sits at the top of the list. The second is you can specify a fixed amount of income that you need to draw.

Less than 50% of funds also say When you specify a fixed amount of drawdown, you can actually specify how much you want that to increase over time, usually up between zero and 5%, or by the consumer price index, or by inflation.

The difficulty you’ve got is there’s no optimal drawdown percentages there. There’s not a schedule of them. You’ve basically got the minimum drawdown rules. You’re left to your own devices to work out what I call the affordable drawdown strategy. Let me go back to how that might be addressed by the industries going forward or is currently addressed. The second thing is if you want to draw a fixed income target, it’s only applied to your account based pension. If you’re trying to hit a certain income level, you want to consider what else you’ve got, such as access to the age pension, it’s very difficult to do.

You basically got to work out your age pension you’re going to get and then say, How much could I draw from my super? And then nominate that amount. As you go through your retirement, the amount you get in the age pension is going to vary. You could start off with no access to age pension if your assets are too high and then eventually cuts in. What eventually forces the member to do is to work out their target, work out their other income streams, work out how much they want to draw from their their account-based pension, say this year, and then fill in a form, and do it again next year. That’s very complicated.

It all makes a little bit difficult to implement these strategies. There is two super funds out there that have variations of the minimum drawdown rules, which allow you to… They apply a higher drawdown rate in the minimum drawdown rules to about age 75, and then they follow that. That’s a bit different. There’s one other super fund that has some variation of the full cent rule, actually. But that’s out of 20 funds that we just looked at recently. There’s very little of this going on in the industry. Unfortunately, it’s tricky for the individual.

Where we’d like to see the industry go is to assist members a lot more in doing this sort of stuff. If they could just provide for an option that had a more optimal percentage drawdown schedule than the minimum drawdown rules and one that reflected your expected, the way you’ve invested, what it returns you expect in future, because the higher your returns, the more you can afford to draw, that would be helpful.

But super funds don’t offer that, except for those two that have some mild variation on the minimum draw down rules. It would be also really good if the super funds were able to offer members’ integrated retirement solutions where their member would invest in, say, an account-based pension with their choice of growth, defensive mix. They might have a lifetime income stream. Then tell some information to the super fund about their personal circumstances that allows them to work out age pension eligibility. The super fund would then say, Okay, you’re invested in solution, and then give them the amount of income they want. Do it for them. But we’re not there yet. This is where I would hope the industry will go in the next 3-5 years. It is investigating what it can do to help members in retirement, but we’re early days as yet. A lot of what I’m talking today, I’m hopeful that the super industry will enable it in due course, but right now, it’s not really there.

Robert Barnes

But thanks, Geoff. That’s a great overview of quite a nutty problem. It’s a shame that there’s not more solutions for retirees around at the moment, but hopefully we’re moving in the right direction.

Geoff Warren

Yeah. I just hope that this helps people find their way.

Robert Barnes

Fantastic. Thanks so much, Geoff.

Geoff Warren

Okay, thanks, Robert. We’ll speak again.