Actuaries develop retiree rule of thumb

A group of actuaries have answered the calls of retirees looking for a simpler way to determine how much money they should draw out of their savings in retirement, developing a new three-part rule of thumb.

The Rule of Thumb Working Group has developed a three-part rule for single retirees receiving a full or part Age Pension but not accessing financial advice, to help them understand how much to draw down from their retirement savings, as they continue to live frugal lives in the fear they outlive their savings.

The rule guides retirees to draw down a baseline rate, as a percentage, that is the first digit of their age. If their account balance is between $250,000 and $500,000, they should then add 2% - as long as they meet the statutory minimum drawdown rule.

For a single retiree aged between 60 and 69 with an account balance of $350,000 the rule of thumb suggests drawing down 8% of their savings - 6% for their decennial age, and the additional 2% - leaving them with an annual drawdown of $28,000.

Actuaries Institute president Nicolette Rubinsztein said many Australians can afford to live better in retirement than they actually do, but don't have enough confidence to draw down more money from their savings than the minimum amount 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 Rubensztein believes the working group's new 'rule of thumb' is a simple and accurate way to solve the issue, taking into consideration a retiree's asset base and age.

The rule comes as ASFA releases its updated retirement standards for the quarter, which shows a single person aged around 65 needs to spend $27,913 to achieve a modest lifestyle. For a comfortable lifestyle, the same retiree would need to budget $40,194.

John De Ravin, one of the rule's five authors, said it was difficult for Australians to determine how much of their account balance to live off each year. With CIPRs still some way off, De Ravin believes the rule of thumb will help retirees keep their spending on track in a simple manner.

"The majority of Australians are members of defined contribution superannuation schemes, and on retirement they apply the balance of their account to start an account-based pension," De Ravin said.

"But it is very hard for retirees, who are generally risk averse, to work out how much of their savings they should live off at any point in time.

"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."

ASFA's September update to its retirement standard shows costs have risen by about 1.5% over the year to the September quarter for couples in the modest and comfortable ranges, compared to a 1.7% increase in the All Groups CPI.

ASFA chief executive Martin Fahy said the increase demonstrated how the drought was starting to hit the hip pocket of retirees, with prices of everyday items jumping significantly. The cost of beef has increased by 7.1% across the year, while lamb has jumped by 14.3%.

"While the increase in the headline rate of the CPI might not look large, the drought is starting to impact on the prices paid by retirees," Fahy said.

"Even with inflation running at a low rate many retirees will be in retirement for 25 years or more and need to take into account future price increases and spending needs.

"With the low rate of overall inflation, the Age Pension is only increasing at a modest rate, with the maximum Age Pension increasing by 1.9 per cent over the last 12 months to September to reach $24,335 a year for a single person (including allowances). The Age Pension is less than what is needed to support even a modest standard of living in retirement."

In the face of these difficulties, Fahy said it was imperative for Australia to increase the superannuation guarantee to 12%.

"Moving to 12% for the Superannuation Guarantee is a necessity for those not yet retired given that many Australians still do not have substantial superannuation balances," he said.

Read more: ASFASuperannuation GuaranteeJohn De RavinMartin FahyActuaries InstituteNicolette RubinszteinRubenszteinRule of Thumb Working Group
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