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Three strategies for retirees to spend their super

It is remarkable that, more than 25 years after the key planks of today’s superannuation system were put in place, we still have not defined the purpose of superannuation, despite recent unsuccessful attempts to legislate an objective.

Indeed, a better aim for our politicians might be to establish an objective for the overall retirement income system, encompassing age pension and related benefits, and compulsory and voluntary superannuation. Looking at the whole system, rather than just superannuation or any other component, would help promote better integration of the various components over time. We hope to see this matter addressed by the upcoming Retirement Income Review.

More focus needed on the spending phase

In the meantime, it should not be contentious to assert that superannuation savings accumulated during working years should be spent down (ideally, as a regular income) in the years after employment ends. But too often even this limited purpose is not reflected in public discussion of superannuation and the retirement system. Often there is an assumption that assets accumulated for retirement are not to be drawn down during the retirement years, but instead act as a ‘capital base’ to generate investment earnings which can be spent but otherwise should remain untouched.

We saw this thinking in the discussion of Labor’s policy to discontinue refunding of excess franking credits. It was clear many retirees or their advisers considered their ‘retirement income’ to be the dividend stream (including franking credits) generated on their share portfolio.

An unrealistic strategy

We should be wary of allowing a ‘spend the income’ mindset in retirement to take root for a good reason – for most retirees, it is simply unrealistic. Living off the interest income from term deposits or the dividend income from a share portfolio sounds attractive but for most retirees (who have little in the way of income-producing assets outside superannuation) this strategy is unlikely to produce an income they might regard as adequate, as shown in Table 1 below.

Table 1: Achieving a target retirement level using a ‘spend the income’ strategy

Target retirement level (ASFA Comfortable)

Required balance if invested in

Term deposit

Australian share portfolio

Single ($43,601)



Couple ($61,522)



- Term deposit rate: 1.57% pa (average of advertised rates for 12-month term deposit on $100,000+ for the four major banks in September 2019).
- Dividend yield: 6.2% pa (average gross dividend yield on ASX200 over 12 months to September 2019, including franking credits).

To achieve an ‘ASFA Comfortable’ income a couple adopting a ‘spend the income’ strategy would need to have a retirement balance of $3.9 million if investing in term deposits, or a lower amount of around $1 million if invested in a higher-yielding (but riskier) Australian share portfolio.

Table 2: Median superannuation balances in retirement













Source: ATO Taxation Statistics 2016-17

These amounts are well above the median superannuation balances by Australians of retirement age, as shown in Table 2. This strategy makes sense only for the relatively wealthy few.

Minimum drawdown rules, OK?

The minimum drawdown rules (MDRs) that apply within the superannuation environment are designed to ensure account balances (including capital) are spent over the pension phase.

While MDRs only specify a minimum amount, many public offer funds still offer little guidance on drawdown strategy in retirement beyond disclosing the relevant percentages. Many retirees commence drawing down their account at the MDR, and a high proportion of members draw down at minimum rates throughout the pension phase, particularly for members with balances at or below the median.

Some funds cite concern about regulatory constraints on providing advice and limited information about their retirees as constraints on offering more tailored drawdown guidance. However, in many cases, a minimum drawdown strategy is actually too conservative, deferring spending that could contribute to the quality of life in early retirement and increasing the chance of leaving unnecessarily large amounts behind on death.

Drawing down well

While longevity protection solutions (more on these later) can address underspending more directly, it’s possible to improve things with careful design of the drawdown strategy used by members.

Consider the following three strategies to drawing down from an account-based pension:

  1. In line with the MDRs (Minimum Drawdown strategy)

  2. A constant drawdown each year, set at a level expected to last until age 90 (i.e. life expectancy plus 3 years) (Constant Drawdown strategy)

  3. In line with a modified set of drawdown factors based on life expectancy at each age + 3 years, but with a limit on the amount by which the drawdown reduces over any year (LE+3 strategy).

Chart 1 illustrates the pattern of income expected to emerge under each strategy (the actual drawdown level will vary depending on actual returns rather than the constant return used in this illustration).

Chart 1: Patterns of income under three drawdown strategies

The Minimum Drawdown strategy provides lower income early in retirement but lasts longer than the other strategies. While ensuring income is available in advanced old age is a desirable feature, many retirees may prefer to bring more income forward to the earlier, more active years of retirement.

Of course, there is a trade-off: a faster spending strategy means retirees can enjoy more of their savings, but equally increases the chance that they will be left without retirement assets if they live longer than expected. Setting an appropriate drawdown strategy can be seen as an exercise in balancing two risks to the retiree – running out of money before death, or ‘ruin’, and leaving amounts behind on death that might be regarded as excessive, or ‘wastage’.

These risks are shown in Chart 2 below, for each of the three drawdown strategies considered.

A Minimum Drawdown strategy, while having a zero risk of ruin, has an unacceptably high risk of wastage, whereas under a Constant Drawdown strategy, ruin risk becomes the concern. Many funds would still baulk at endorsing a strategy with a one-third risk of running out before death.

This suggests a middle ground, like the LE+3 strategy, can provide a better balance of these risks. Research we have conducted in this area shows that this strategy can be further improved by additional modifications to the drawdown algorithm (such as floors and ceilings to reduce large variations in year-on-year income).

Chart 2: Likelihood of ‘ruin’ and ‘wastage’ under different drawdown strategies

Ultimately, no strategy alone can ensure a stable income for life. Ideally, as well as developing a default spending policy for retirees, funds would offer a complementary longevity product (such as a deferred annuity) to provide ongoing income where a retiree outlives their savings.

So, what can be done?

Superannuation funds and the industry generally can promote spending down of balances smoothly during the retirement phase. Some ideas are:

  • A retirement income objective: Developing an objective with substance will be contentious, as industry stakeholders and other participants will have differing views. For instance, should our system aim to deliver poverty alleviation, age pension supplementation or a standard of living defined by reference to working life earnings? Whatever benchmark is set, an objective should provide that retirement provision be in income form, and capital balances be spent down over retirement.

  • Retirement income estimates: Providing estimates of projected retirement income during the accumulation phase (particularly as members approach retirement) promotes the primary aim of superannuation as spending in retirement. These estimates are currently provided by many funds but are not universal. Ideally, income estimates should be made mandatory, with some sensible limited exceptions at the fund and individual member level.

  • Careful use of the term ‘income’: Language matters. In communicating with retirees we often see ‘income’ used to denote both investment earnings (such as dividends, rent, interest etc.), and the income received from a fund during retirement phase. This dual usage can cause confusion and promote the ‘spend the earnings’ concept described above. It’s often better to use ‘drawdown’ or similar terms to refer to amounts paid to retirees in pension phase.

  • Well-designed drawdown rules: Funds should review their default drawdown offerings to ensure they are not too conservative and do not promote inappropriately low spending by retirees.

  • Better retirement products: Ultimately, most retirees with meaningful balances will spend their savings more confidently earlier in retirement only if they are sufficiently comfortable that they will not run out of money in advanced old age. The continued development and promotion of longevity protection products which can provide this comfort remains a high priority for the industry.


Nick Callil is Head of Retirement Solutions, Australia at Willis Towers Watson. The information in this publication is general information only and does not take into account your particular objectives, financial circumstances or needs.



Why Grattan’s got it wrong on super

$1 million is never worth less than $500,000

Why do most retirees spend less than the age pension?



October 19, 2019

Given that a couple has a 70% chance that one of them will survive until age 90, cautious retirees need to plan for their saving to last for at least 25 years. A lot can go wrong in that time. Life expectancy at retirement is an average, with about half of retirees living longer and more people living past 100. Planning to live to a certain age is risky, (longevity risk) and planning to live to the life expectancy will be inadequate for about half of retirees. Most planner do not worry about longevity risk because when the money runs out, it is covered by the taxpayer with the age pension.

As a retiree my task is to make sure the money will last a retirement of uncertain duration and complexity. Similar uncertainties exist around unexpected health issues, loss of capacity and age care and when the next stock market crash (market risk) will occur.

When our learned friend can use his sophisticated model to tell me exactly when I will die, how much my health care and age care will cost, what the inflation rate over the next 25 years (inflation risk) what the market returns will be and when the politicians will move the goal posts again (legislative risk), I will follow his advice.

Until then he is just another “expert” who is not retired.

Graham W

October 14, 2019

I sort of agree with Boyd. I am also a retired financial planner and working out how much to take each year from your super is mostly relevant to those not receiving any Age Pension. Once one is eligible, the Age Pension becomes a de -facto annuity as it is paid by the government.If a deferred annuity had worthwhile Centrelink advantages, that may be the answer.Stage 1 Super draw-downs and a DA later on. Stage 2 Super and AP with the DA still to come Stage 3,any super left,the AP and the DA paying out.


October 15, 2019

If you need to factor in as a solution Centrelink and the Age Pension then the “only” solution is the family home which is exempt from the Age & Veteran’s Pension Test regime.

Specifically ruled out for any consideration by the current Federal Treasurer and ardently supported by the Labor opposition in the current review being undertaken into retirement income.

Over capitalise the family home.Problem solved.

Collect Centrelink and Welfare Pension benefits, have a moderate living life style and Make the totally tax free family home the nest egg to fund longevity by downsizing at some very late future point of view to supplement your then cost of living.


October 13, 2019

On retirement if one is worried about longevity, at the point of retirement why not consider leaving say 25% to 35% of the Superannuation Accumulated amount in the accumulation phase and only convert the rest into a retirement income stream (similar to a deferred scheme) and draw down from the accumulation funds s required as and when needed.

This should be of great interest to individuals who are capable of saving more than the arbitrary cap of $1,600,000 per Superannuation member at retirement point as the excess funds could grow at a tax advantaged position that leaves the insurance bonds much touted as an alternative for excess retirement savings in the shade and can be drawn down at any point in time without restrictions.


October 13, 2019

I don’t understand - I thought Super was meant to replace the pension- if you can’t choose to spend your Super and go on to the Pension then you should have enough to live on in your old age. You seem to be advising people who have Super to spend it in their early years of retirement and then if they live too long to go onto the pension!!!!

SMSF Trustee

October 14, 2019

That was never the intention of the superannuation system, CC. Super was always a means of encouraging people to save for a better retirement than the pension alone would give. Some folk would end up saving enough to not need (or be eligible for) the pension, but there was always an expectation that many would be on full or part pension.

From early days, the idea was a 'three pillar system' that included 1)the compulsory superannuation contribution to be made by employers on behalf of their staff; 2) voluntary super contributions; and 3) the old-age pension for those for whom 1 and 2 weren't sufficient. For all the policy stuffing around over the years, those 3 pillars remain in place.

You're not the first to have that misunderstanding.


October 10, 2019

As someone approaching 80, ( but according to Warren Buffet, approaching my prime), I enjoyed your newsletter on retirement.

Very, very good.


Peter Vann

October 10, 2019

Nick, at last a constructive article offering some thoughtful discussion on solutions compared to the many “expert industry papers” that only raise the problems.
Whilst it seems ludicrous that the industry is still pondering the purpose of superannuation, a pragmatic discussion on spending strategies through retirement gets to the crux.
I personally believe that the industry has at its disposal all the tools necessary to manage the retirement phase, if they choose to implement them!
Regarding spending strategies, I believe that they should account for the changing spending profile through retirement** and the strategies be periodically revisited, eg using simple online tools if one doesn’t have or need an advisor.


** eg see some of the papers by David Blanchett

mark lewis

October 10, 2019

As a recently retired person with a SMSF I am considering all of the above, I want a good quality of life but dont want to run out of money. The problem in deciding your drawdown strategy is deciding what income generation % to use PA. Deffered annuities seem like a great answer but then the problem is putting so much of you super into one basket and what happens if the company providing your annuity goes to the wall? I think the answer is a government gauranteed annuity
Mark Lewis

Michael Elsworth

October 10, 2019

Some really well made points here Nick. I think you're correct in saying some of the 'big picture' questions need to be answered in order to provide the industry with greater guidance. The purpose of superannuation and a retirement income objective for starters....

Boyd Craig

October 10, 2019

Good article, Nick.
As a retired financial planner, I am amazed that the issue of deferred annuities has not been given more importance by legislators and the industry. If I remember correctly, proposed legislation has been 'lying around' for well over a decade.
Deferred annuities offer the benefit of a defined date (normally life expectancy) so a person knows that his/her 'drawdowns' from retirement assets have to last until that specified age when the deferred annuity payments kick in. It provides certainty in a very uncertain period of life and it should come at a reasonable cost unlike life annuities which can tie up large amounts of capital for relatively low drawdowns.


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