Recently-published research by the CSRIO-Monash Superannuation Research Cluster suggests that a large proportion of retirees could be described as "slow on the draw" when it comes to their account-based superannuation pensions.
This research paper, Superannuation drawdown behaviour, concludes that many retirees in their sixties and seventies are perhaps drawing down on their super pensions unnecessarily slowly and a substantial amount of their super savings may remain during their lifetimes.
Critically, the research paper highlights once again the tremendous challenge faced by retirees when determining how much to drawdown on their super savings given their concerns about the possibility of outliving those savings.
And the challenge of how much to draw down is shared by retirees receiving a super pension whether or not they have relatively small balances, large balances – or somewhere in between.
There is clearly an issue among a large number of retirees with super savings of perhaps depriving themselves of a standard of living in retirement that they can afford.
In turn, the findings of the research emphasise that retirees need guidance – including perhaps from quality advisers – on how to drawdown on their super savings given their circumstances.
Much of the focus of Australia’s super system has been on the accumulation of saving during the members’ working lives with much less attention given to how to handle superannuation in the retirement phase. However, this is likely to rapidly change with the aging of the population and the waves of baby boomers entering or nearing retirement.
The authors of the Monash-CSRIO research paper, who include behavioural economist Andrew Reeson, write: "The account-based pension system requires retirees to make complex decisions. Longevity and future expenses are highly uncertain, particularly for younger retirees.
"Defining the optimal drawdown under such circumstances is therefore a great challenge," they add.
Retirees receiving an account-based pensions must, of course, drawdown an age-based minimum percentage of their pension account balances each year – ranging from 4 per cent at under 65 to 14 per cent at 95 or over. But there is no maximum on the amount that can be withdrawn in any year.
The Monash-CSRIO research suggests that many retirees in their sixties and seventies are treating the minimum withdrawal rates as a default option rather than making a decision on what they can afford to drawdown.
And the researchers comment "When faced with a complex decision under uncertainty, many people will try to avoid it altogether; where that is not possible, they will look for a default. Once a default has been identified, it acts as a powerful magnet."
The research examines tax office statistics covering a random sample of 50,000 individuals with solely an APRA-regulated fund balance; 50,000 with solely an SMSF balance; and a further 50,000 with a balance in each type.
To counter the lack of information from the ATO regarding drawdowns from non-SMSFs, the researchers studied the pension drawdown patterns of 2600 retired members of a large APRA-regulated fund.
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Robin Bowerman is Head of Market Strategy and Communication, Vanguard Australia. As a renowned market commentator and editor Robin has spent more than two decades writing about all things investment. |
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