The article by former leading superannuation consultant, Don Ezra, on his calculations on how much to spend in his own retirement attracted great reader interest and so far has been viewed over 12,000 times.
Many readers have done similar calculations for their retirement, and their experiences and learnings are worth sharing. We reproduce selected comments on how not to run out of money (with minor editing).
Goronwy
I think you are over thinking. Invest in well run companies (wealth creators) and the rest will take care of itself. That has been my approach and as a result my SMSF is worth a lot more than when I went into pension phase. If you want some personal cash safety to ride out periods of low stock prices I think a large overdraft facility secured against the house is a good idea, but the main question is what you buy not the percentage allotments of risk.
Mary
SMSF commenced 2000 invested 100% equities. Imputed credits have offset mandated withdrawals and growth has ensured capital has not declined. Am in my 92nd year and capital is the same as in 2000 although purchasing power has declined.
Steve
Heartened to see my much less analytical approach looks about right. I am working on a 5% of total assets (in and outside super) as an annual budget and around 5+ years of cash reserves. I currently have more like 8 years of cash (more if I allow for cash generated via dividends etc) but am not sure if now is the best time to add more to my growth assets (currently 60/40 growth/defensive with a 75/25 target; the 60/40 mix has about 8% historical return and the 75/25 around 10%). As the current mix is still providing >5% return hence not drawing down capital, I have some reserves to add to the market if there's a fall. Intending to revisit the plan every three years and adjust.
John
Thank you Don for your very enlightening article. It has convinced me that I have taken an excessively conservative approach with our SMSF, so it's time to take a bit more risk.
(My reply to John: Hi John, not offering any investment advice but markets are expensive and Don's article is about positioning for the long term. Portfolio adjustments are best done gradually towards a goal, and living with the short-term volatility).
Jon Kalkman
"Because we’re always withdrawing money, our assets decline over time. So if we have poor returns early, there won’t be enough of a base to make up the losses even if the later returns become above average. So we need to be able to make withdrawals without affecting the shortfall too much."
With this one paragraph, Don has described the problem that I have with institutional super funds funding my retirement that I do not have with our SMSF.
It is possible to structure an SMSF so that that the pension withdrawal is paid from income produced by the fund, not by selling assets.
In an institutional fund I buy assets (units in the fund) with my super contributions in accumulation phase. In pension phase, each pension withdrawal is paid by the sale of some units in the fund. Once sold, these units cannot be replaced as a pension fund cannot accept any more contributions. The number of units sold depends on the unit price and the process continues until all units are sold and the pension expires. Selling assets into a falling market (think GST or COVID) simply hastens the day when the pension stops. Selling assets to fund a retirement raises the critical question: “Will I expire before my assets do?”
It makes sense to take pension withdrawals from a non-volatile bucket such as cash but this is only a temporary solution because assets still need to be sold when the cash bucket needs to be replenished. It is just that in timing such a sale, it may be possible to avoid a market downturn.
With an SMSF, the pension withdrawal is paid from income produced by the fund, not by selling assets. A cash buffer is still needed to cover any unexpected shortfall in income. It means the fund is less concerned with market volatility and that means the asset allocation can be tilted towards growth assets and higher returns.
As this strategy provides adequate income now, and in the future, this could continue indefinitely if it wasn’t for the mandatory pensions that increase with age. In time, some assets will need to be sold to pay these large pensions but it does not mean that the capital is lost. It simply means that this capital must be removed from the tax-concessional area of a super pension fund. It can therefore be reinvested outside super to continue to produce income - albeit in a less attractive tax environment.
Stephen
Jon, you make some valid points about the issues with unitised investments that reinvest dividends/distributions. A similar "income drawdown from dividends/distributions plus cash bucket" strategy can be put in place in Industry and retail structures via a Self Managed option. You swap some flexibility (some percentage of assets may have to be held in the Industry fund's options and there may be restrictions on ETF's, funds and shares) and possibly lower brokerage costs for less admin as the "back end" is all handled by the fund.
Outside super you could employ this strategy "income drawdown from dividends/distributions plus cash bucket" losing some flexibility but leaving the "back end" to fund.
Jon Kalkman
In an institutional fund there are certain advantages because you are not the trustee.
The “Self-invest” option is just one of the investment options you can choose. You can allocate your money among other managed options as your needs change and that may be attractive as you get older. There is also no more compliance paperwork such as the audit or tax return.
But there are also disadvantages because you are not the trustee.
The fund trustee owns the shares, not the member. These “shares” can be sold without your knowledge or consent. The member does not automatically benefit from share ownership, eg. share buybacks.
The “dividend” is paid to your account by the Fund, not the share registry. Any franking credit refund is paid to your account by the Fund, not the ATO. Your pension must be paid from a managed option, not from your “dividends”. These arrangements depend on fund policy, not legislation and are easily changed.
The fund provides no advice on your asset allocation to equities. In fact, you are charged extra to use you own broker. The fund accepts no responsibility for your investment outcomes. Clearly, they prefer to have your money in their managed options because that generates their fees.
Mart
Jon - really good points, thank you ! That said, some institutional funds allow you to 100% 'DIY' (individual shares, LICs, ETFs if you wish) these days (in their 'member direct' offers)
Rob
Although many of the principles are similar, the Australian retirement landscape is a little different in that:
- income and capital gains are tax free
- mandated minimum drawdowns as you age
I agree the old 60/40 equities/bond split is a bit academic as is the mantra that the "% in Bonds should equal your age". Somewhere between 2 and 4 years living expenses in Cash/Bonds seems about right to weather most storms, so it then becomes an Asset Allocation decision!
Given the tax free status in pension mode in Oz, it does not really matter if you chase income or you realise capital gains when required. What I am seeing amongst a number of retirees in their mid 70's and 80's with reasonable balances of $1m or more, where they are "forced" to drawdown 6% or 7% of their Super Funds each year, it is often "more" than they need. While it may forcibly "come out" of Super, dependent on their other investments, it may still be invested, effectively, tax free, with any income under the income tax thresholds. Not all bad!
Irene
Hi Rob, from 65 - 74 years old, we compulsory to withdraw 5%. Then from 75 is 6% etc. I think it is fair, because all the income or capital gain in our pension fund (which changed to allocation) are tax free. Government aim self fund retiree to spend their money. If you do not need 6% and 7% to live on, you still can invest outside the super. Yes, pay tax if you make profit or have distribution.
Stevo
Spot on! If you have the assets to do so, set aside up to 5 years cash as a buffer to live on if markets have a major correction, and then actively invest the rest. Just by increasing the amount in active growth and income investments early on, you increase your overall pot SO MUCH MORE than the traditional ultra conservative approach. In Australia, with franked dividends and tax free pension earnings, you may find your pot grows much faster than you can draw it down. You should be able to generate in excess of the 5%, 6% etc. mandated annual withdrawal. And as the pot grows, the amount you withdraw also goes up - and you can put aside outside of super, what you don't spend to splash!
A fixed percentage in conservative investments doesn't make sense if you have substantial balance to start with - just work out what you will need and invest the rest.
Tony
The safety amount should factor in annual income from investments (or at least a portion of annual investment income for safety reasons) as this is cash available each year. When this is done, it will increase the % in growth investments.
John De Ravin
I agree with Tony’s comment. In Australia for example, due to our tax regime, companies pay quite high dividends- they probably average out to 4% to 5% inclusive of imputation tax credits. It’s true that dividends fall when the market tanks, but by proportionately less than the fall in market values. The dividend stream has a big impact on the size of the cash bucket that you need to maintain.
Dudley
The "real" problem is that the only attractive longevity insurance of relevance to most retirees is the capital and risk free Age Pension.
Fortunately, it is about 2 x the cost of living for home owners.
Thus investments need only furnish the cost of entertainment and a capital buffer (the full Age Pension Asset Test $401,500).
From a fund invested in risk free assets yielding real 0%, to withdraw for 30 years $37,000 / y to equal the capital and risk free Age Pension requires initial capital deposited into the fund of:
= PV(0%, 30, 37000, 401500, 0)
= $1,511,500
These are general comments from readers, not personal investment advice. Don Ezra says he will follow up with another article to address some of this feedback.