Superannuation minimum withdrawal rates double for retirees

Who in their right mind decided that now is the right time to double the salary of many Baby Boomers?

Well, it was none other than the Federal Government which has finally, and most likely very belatedly, called a halt to a pandemic measure to halve mandatory withdrawals from superannuation.

That’s right, for those who have retired and living on a pension drawn from their super fund, the minimum withdrawal rate has doubled as of July 1 this year.

Reversion will bring a big pay rise to many

That means that the minimum withdrawal rate reverts back to between 4% and 14%, depending on age, after a couple of years in which it fell to just half of those numbers.

While these amounts are minimums and there is nothing to stop boomers and even older retirees from withdrawing more, it seems like the vast majority of people living off superannuation take the minimum rate.

For example, Aware Super said that before the COVID-19 changes around half of its customers in drawdown mode took the legislated minimum.

That changed to around 40% during the pandemic, which is still a lot of people whose monthly or fortnightly payments will need to increase now that the “emergency” halving of the minimum withdrawal has ended.

Withdrawals already rising

That’s a lot of cruises to be taken, particularly for those aged above 75 who are much more likely to be on the “minimum” withdrawal rate.

Interestingly, withdrawals were already on the rise before this change, with an impressive $14 billion of one-off withdrawals drawn down in the last quarter.

Although it is hard to be definitive, those withdrawals to bolster regular payments may well have been to cover rising living costs or perhaps to pay down debts that have become much more expensive now that interest rates have risen sharply.

All of which raises the question of whether these mandated withdrawal minimums are set at the right levels in the first place.

Longevity versus a living wage

The whole idea of the limits is based around longevity combined with eventually draining as much as possible out of super accounts before death, given that they are designed to support people in retirement rather than act as a form of tax shelter for beneficiaries.

So, with the end of the temporary reductions, which quite surprisingly applied from March 2020 right through until the end of June this year, we are back to the old minimum drawdowns which start at 4% for those drawing a private pension until the age of 74, then increasing to 5% (65 to 74), 6% (75 to 79), 7% (80 to 84), 9% (85 to 89), 11% (90 to 94) and if you really win the genetic lottery, 14% from the age of 95 onwards.

Many accounts keep rising in retirement

As you can see, if we assume average long term super returns of 6.5% for balanced funds and 8.1% for growth funds, balances should keep rising until around the age of 80, which is why so many super accounts end up being inherited rather than being used to support an income in retirement.

The minimums also don’t make a lot of practical sense, with the more active and higher spending years likely to be in the 60’s and 70’s – the same time that the minimum withdrawal which many people settle for is quite low at 4% to 6%.

After that the super cash will start to pile up in the bank account just when activity levels and travel tend to drop off and the only cost that tends to be rising is medical and/or accommodation through retirement homes.

Minimum may not be optimum

It is for this reason that many financial planners opt to change the payments above the minimums in the early years – depending, of course, on individual circumstances.

In the early retirement years 5% is often seen as a happy medium between the minimum 4% and the need to keep balances rising gently or steady – depending on financial market conditions and risk tolerance, given that returns on “riskier” growth and high growth funds tends to be higher.

Sometimes – again depending on circumstances – withdrawing 7% or even 8% might make sense.

Of course, if you go too crazy and adopt a much higher percentage, there is a risk of outliving your savings, although there are circumstances when withdrawing lump sums might make sense to pay off debt.

Either way you look at it, once again Boomers might well be descending on the airports and cruise terminals in record numbers, particularly now that interest rates have ramped up risk free returns on super term deposits.