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How to manage the run down in your income in retirement

Australia’s superannuation system ranks among the world’s best but running out of money is still a major concern for most Australians in or approaching retirement.

There is good reason to be concerned. Most super funds still lag in offering suitable retirement products to ensure this is not the reality.

What can you do about your concerns?

If your superannuation is with a large institution, the reality is that your fund might not yet offer a modern retirement income product so your balance is likely to move into an Account Based Pension (ABP) when you retire.  

ABPs require you to withdraw a minimum percentage of your balance each year as your ‘income’ in retirement. The following percentages apply to your ABP balance at the start of each year and are the minimum you must withdraw (although these levels have been temporarily reduced by 50% in FY20, FY21 and FY22 in response to the pandemic).

Account Based Minimum Annual Pension Payments:

Age in years at start financial year?

% account balance to be paid as a minimum

Under 65














For this purpose, let us assume that a member can earn 6.5% p.a. each year in retirement and inflation is a fixed 3% p.a. Notice how the minimum percentages are initially less than the assumed investment return and from age 80 are greater than the assumed investment return.

When the investment return is higher than the minimum withdrawal, your account balance (assets) increases in dollar terms. Later, when the investment return is less than the minimum withdrawal, your account will correspondingly decline in dollar terms.

Remembering we have assumed the same investment return every year (6.5%), when in reality we know it will change regularly and the real-life experience could show greater variability than assumed here for ease of understanding.

So how is this reflected in your actual annual pension income each year of retirement? An income projected to the end of the Australian Life Tables would look like this:

But will that be enough income when you need it most?

Planning cash flow in retirement is extremely difficult because of so many uncertainties around – expenses, health, investment returns and of course - how long we are going to live.

To maintain your standard of living, you will need your income to increase in dollar terms, and maintain its value in real terms i.e., in purchasing power. To view the income from the above ABP in real terms (today’s purchasing power) we remove the effects of future inflation and ignore any income from other sources such as the age pension.

So, let’s take a closer look.

The ABP income in real terms maintains its value (broadly) until just after average life expectancy. So, the maximum offset provided by an ABP against having to claim an age pension occurs before life expectation.

Many existing ABP pensioners have not yet reached this age as ABPs (and their predecessor, the allocation pension) have not been available for long enough to see many pensioners experiencing this decline in income in real terms (unless their actual rate of investment return is less than the assumed rate of investment return).

We can also look at an ABPs projected balance in real terms as shown in the chart below. Only if the investment return earned is greater than the minimum percentage plus the rate of inflation, would the account balance increase in real terms. Between ages 65 and 75 this requires an investment return of at least 8%.

The orange line on this graph shows the percentages of 65-year-old males who are projected to still be alive at each future age.

Females and couples have a higher percentage projected to still be alive at each future age as their life expectancies are longer, and as a result they will spend more time where income and assets are declining in real terms and need to plan accordingly!

Since the mid-1980s the mortality rate for a 65-year-old male has fallen by more than 50% and this trend is expected to continue. This means, the orange line is expected to shift to the right and you will live longer than you think and spend more time when your real income might decline.

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How can I make my money last the distance?

The good news is that more modern retirement income products are starting to be offered by superannuation funds to provide an increasing (in dollar terms) pension that lasts for the life of a single person or a couple, and ought to provide income that on average does not decline in real terms.

An example of the income that an investment-linked lifetime annuity might provide is indicated by the orange line in the chart below and provides a direct contrast to the previous declining income projection.

This is assumed to be supported by the same investment choice as the ABP, but with a deduction of 0.5% p.a. from the net return to allow for the costs of providing longevity insurance.

There is an urgent need to deal with the high levels of worry about retirement income for all Australians. For greater peace of mind, security, and a better retirement outcome from one of the world’s best retirement systems, in one of the world’s best countries to retire in, longevity needs to be addressed.


David Orford is the Founder and Managing Director of Optimum Pensions. Optimum Pensions was launched in late 2017 with the objective of providing innovative sustainable retirement income solutions. This article is general information and does not consider the circumstances of any investor.

This is the first of five articles which will examine alternative solutions to reduce the potential to run out of money for retirees.


August 07, 2021

David Orford : Re : Account Based Pension (ABP) You state that "In particular, each of us has only one life - we'd like to enjoy that to the full - which sometimes requires income.".... which is axiomatically blindingly obvious! The graph 'Income over time' produces a maximum of about $32,500 which is not a great result when you consider that the pension is about $37,000-00 for a couple in todays money. So it almost becomes a case of "Why bother saving for Superannuation when you can go straight onto the pension? although you precluded that in your introduction "ignore any income from other sources such as the age pension"...what? 

Ray F
July 11, 2021

Hi David,
Good article on this subject.
I did a bit of my own 'research' on returns, and found that if a SMSF investor in 2021 had a balanced diversified portfolio, with approximately a third of their Super equally invested between the asset classes of shares, bonds and property, (ie; 1/3 each in ASX shares, a capital city unit property, and a bank term deposit), they would receive an approx yield return of 2.4%, well below the 4% minimum drawdown rate for a 60 year old.
Alternatively, if they were even more conservative and had approx a quarter of their Super invested equally between shares, property, Aust govt bonds & bank term deposit, then they would receive an even lower yield return of around 1.8%
By comparison, an investment in the above 4 asset classes back in 2010 would have yielded a return of approx 5.2%
It seems to me that the current Super drawdown rule was enacted by Government at a time when investment yields were much higher than today, and a retiree then could comfortably set an asset allocation that would derive them a 4% drawdown that was sustainable and would not require them into forced asset sales.
The problem for retirees today is that in search of higher yields from which to derive a sustainable income, they need to go higher up the risk curve, and hence face greater risk of capital loss.
This is happening at a stage of their lives where their horizon outlook is shortest, and they have the least chance to recover from a severe market downturn should their higher risk investment eventuate in a capital loss.
Surely it should be up to retirees to decide on what kind of drawdown pension from their Superfund they can comfortably live on, and if in a year of poor returns, they decide to live on a lower drawdown of say 3% instead of the mandated 5%, then that should be left up to them. After all, it is their own money.

July 09, 2021

Very interesting discussion around the technical side of this issue.
However, the parents of post war baby boomers generally had no super, and on retirement at age 65, they had just the age pension in most cases, and for those who served, the Vets might have also had their disability service pensions. The Vets of course were granted their age pensions a bit earlier, around age 60. Some of them lived to ripe old ages into 80's and 90's, and seemed to enjoy a full life.
We younger ones have had the benefit of super for many years now, and our kids and grandkids will enjoy a 10%, soon 12%, pre tax super contribution rate for 40 years or longer.
If only I had that benefit!!
So, indeed, why would we want to leave our hard earned super to the younger age cohorts and deny ourselves a wonderful lifestyle. As David Orford suggests, they will inherit our expensive houses and memorabilia, plus any other non super investments in most cases.
The superannuation system was not designed as a legacy structure, but to support us in our advancing years, so consuming it overtime should not be an issue. After all, the age pension system will always be there for those who need it, and it IS a guaranteed, indexed, income until death, something very few corporates do not, or cannot provide in these low interest return times.

D Ramsay
July 08, 2021

Good article thanks.
But how about also showing graphs/tables/projections or whatever that compares current total super assets ($) over time with the draw downs, inflation etc

July 04, 2021

QSuper's product looks good. And with a large pool of funds, their lifetime pension can invest in a less conservative manner and can hopefully, keep returns to 5% or better for members....

David Orford
July 05, 2021

Thanks John. You are very correct in everything you say.

In particular, each of us has only one life - we'd like to enjoy that to the full - which sometimes requires income. The ABP leaves relatively large amounts to a couple's children (if any) after the last death of a couple. Why leave such a high ABP balance when that has been accumulated by foregoing income during one's lifetime. Isn't the house, the car etc. enough to leave to children?

Due to increases in productivity, our children have a great chance to have a higher standard of living than us. We don't need to leave them more than our parents left us in real terms.

We could have chosen our assumptions to make the orange line decreases in real terms. The increase in income from the investment linked product is linked to investment returns but less a factor in order to bring forward income to the present. In practice, a lifetime annuity/pension gives great income security - which can lead to investing the underlying assets to earn higher income. We chose a balanced investment option. Maybe suitable when there could be another 20 or even 40 years of life left

Eric Ranson
July 04, 2021

It sounds like investment risk is a far bigger issue than longevity risk. Why are advisors not interested in supporting indexed assets?
With indexed assets and perhaps a little longevity cover (for efficiency), you could offer [XXX] (based on current savings) in today's dollars for each year of retirement - no risk, no estimated investment outcomes, no asset allocation adjustments.

July 04, 2021

My belief is that the primary problem holding back this form of income assurance (as opposed to insurance) is the poor returns offered versus what people expect to be able to produce from a quite vanilla investment mix themselves; they find it very difficult to forego a significant potential income for a guaranteed future income. Who provides the guarantee is also a problem. Commercial organisations like Challenger I understand are forced to have a very conservative portfolio to protect against losses preventing future commitments being met, but this forces the return way down. As stated earlier, once you could get 6% with a hefty component of fixed income, but no longer. Finding a way to bridge the gap between long-term average returns and the quite low annuity returns being offered is the missing piece that needs to be resolved.

July 04, 2021

I believe that Challenger would be maximising their income and who would know what that may be. Challenger needs to earn a profit and put aside some capital before paying returns to their members.

July 04, 2021

Hi John. I agree Challenger needs to make a profit as it is a public company with shareholders to satisfy. And therein lies the problem, very low returns from very conservative investments they are forced to make, minus the shareholders expected profit means the annuity holders aren't getting a very attractive deal. Its the old risk and return game - if someone is guaranteeing you a future return, and they are being prudent, they can't take on too much risk themselves. I can see a future where not-for-profit organisations like the industry super funds take the fees (albeit hidden in the case of Challenger) charged (aka company profit) and cut them to increase the return to the annuity holders.
I have had a look at the Challenger website today and it is interesting how difficult it is to see how much of a future annuity/return is from investment performance and how much is just handing your own money back to you!

John De Ravin
July 04, 2021

Thank you for the article, David! I agree completely with your key proposition that longevity is a risk that is currently borne entirely by consumers, but which could and should be mitigated by product development as part of the Retirement Covenant.

At first I was puzzled as to how the orange “indexed annuity” line could always be higher than the ABP payments despite being based on the same underlying assets and having to meet the 0.5%pa cost of longevity insurance. Then I realised that of course, the annuitants can get more over their lifetimes because there will be no residual benefit for their beneficiaries when they pass away. This is a strong point in favour of annuities whenever the predominant objective is living standards in retirement rather than legacy to beneficiaries. After all, if the retiree is a homeowner and takes retirement income in a mix of indexed annuity plus ABP, the beneficiaries still get both the remaining balance of the ABP, and the home.

I was curious about one technical point though. The orange “indexed annuity” line in the bottom chart slopes gently upwards. That suggests the the annuity is indexed to increase a bit faster than the rate you have used to deflate future payments to current dollar terms. But it wasn’t clear to me why. Also, would you really want increasing real income when the prevailing view seems to be that spending falls in real terms as a function of age?

July 03, 2021

How about making the whole complicated mess simple by using an insurance based, bench marked, return arrangement. i.e When a financial services company, advisor or pension fund takes your money to look after it for you, they have to invest it such that the minimum achieved return on the money is above the benchmark.
The benchmark doesn't have to be to high as long as it's above the return one would receive if the money was dumped in a bank deposit account. If the return is lower than the bench mark then the Insurance cuts in automatically and brings it up to the minimum benchmark.
This would insure we don't loose all our money when an event such as a GFC comes along.
The advisor in the Financial Services company or fund handling your money must have their own financial services licence issued by the Govt and counter issued by the Insurance Company. i.e. no licence to take and invest peoples money renders them out of a job with high penalties for continuing to advise.
They must hold their own financial services licence and not borrow or use a licence issued to somebody else or some other company as they do now.
The actual returns achieved on each individual investment the company is looking after is to be published so that we, the general public, can see who is worth employing to look after our money and who is not.
The insurance company can if it decides an advisor or financial services company is costing it to much money in the form of payouts, can remove the advisors or Financial services companies licence. and put them out of business.
I don't know about anyone else but I want my super balance to keep rising and not run out, so it can be passed on to my children.
The word inheritance is hardly mentioned in anything I see from the govt. Wouldn't it be nice if we could just roll over our basically still intact super fund money we have been drawing down on in retirement straight into our children;s super fund for their retirement. Save the govt. paying out Jane Hume's "generous" age pension, and remove from the Finance Industry all the "ticket clippers" middle men, and fat cats, using our money to make them selves rich. A financial services licence Insurance cover would stop all the rackets.

Jeff Broderick
July 09, 2021

The system was not created for you to leave an inheritance for your children, partially paid for by taxpayers via generous tax advantages. It was created for you to enjoy your retirement, with the expectation that your super balance would run down over time. This is why the minimum drawdowns increase with age.
It is not a vehicle for the relatively well off to pass money to their children tax free.

July 09, 2021

I disagree Jeff. As I recall the system was to leave Australians wealthier as they retired without relying upon the state, not to dictate what they can do with their own money. The tax concessions were a reward for agreeing to delay gratification, to lock up funds for a very long period of time which has now been extended 5 years. I recall a time when the age pension was available to all, including those who did put aside for retirement. Now not only has that been taken but arguments seem to be endless as to what people should be allowed to do with their own money. These arguments are so frequent with so many involved, with so much rewriting of history, and with so many changes having been made on a regular basis already, that I now doubt it is worthwhile for younger people to save via superannuation today. Many would rather buy their own home or are making other arrangements.

July 02, 2021

I believe QSuper has just launched one of these products. Hopefully other superannuation organisations will look into this and create similar products.

July 02, 2021

Thanks Sue

July 02, 2021

How would I find a list of companies offering these new products? When I last looked at Challenger the return was very low for a lifetime annuity.

Gerald Clark
July 01, 2021

Excellent presentation of the situation. Where can I get hard copy?

Graham Hand
July 01, 2021

Hi Gerald, do you mean other that using the print button at the top of each article, which generates a pdf of the article?


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