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A framework to maximise retirement income

When you retire, your salary stops. From that point on, you need to fund your lifestyle using your own savings plus any Age Pension income you might become entitled to.

For wealthy people, this might be easy, even without an age pension. For those with little, it can also be straightforward, if they’re able to live on the age pension as this provides them a lifetime income stream.

But for those in between, referred to here as ‘middle Australia’, the maths to get this right is difficult. A key issue is that no one knows how long each retiree will live. It’s therefore not possible to calculate how much someone can safely draw from super as you don’t know when their balance needs to reach zero.

The key points summarised below form the basis of an Actuaries Institute Dialogue Paper A Framework to ‘Maximise’ Retirement Income, which I co-authored alongside Andrew Boal.

The following chart illustrates the actual age of death for all Australian retirees who died during 2020 as published by the ABS. Nobody can predict how long they will live.

Source: Australian Bureau of Statistics figures. Note: median is the 50th percentile.

In Australia’s retirement conversation there can be a lot of confusion around the terms ‘retirement income’ versus ‘retirement spending’ and ‘investment income’.

'Investment income’ is a term used by the Australian Taxation Office (ATO) to include interest, dividends, rent and income you receive from trusts.

‘Retirement income’ can be broken down into two categories:

  1. For assets outside superannuation, it is likely to mean the investment income that ends up in your bank account and can be spent (or re-invested).
  2. For superannuation assets, it’s likely to mean the amount drawn down out of your superannuation fund and paid into your bank account to spend. With most super funds, this is a choice you have to make, subject to a minimum level. There can be a disconnect between the investment income earned on a superannuation fund’s underlying assets, the amount that is drawn out each year and the amount that is actually spent by the retiree each year.

When we examine the needs of middle Australia retirees, it’s clear they’re likely to want their income from superannuation or their SMSF to last for life. It means their ‘retirement income’ should end upon the death of each individual, rather than ending at a pre-set age (e.g. based on ‘average’ life expectancy).

In order to fully maximise their retirement income, retirees would have to consume all the capital in their superannuation fund as well as all the investment earnings (i.e. there would be no death benefit payable from superannuation).

Measuring retirement income

So how do we quantify retirement income if it’s based on drawing down a balance over an uncertain timescale?

An approach used in other countries when doing retirement projections is to base the figure on a lifetime annuity formula. This is the formula an insurer or defined benefit pension fund would use to calculate the annual income that could be provided for life.

What is a lifetime annuity?

A lifetime annuity is a product that provides you with an income for the rest of your life, which you buy with your superannuation or other savings. With a traditional annuity, the payment level is guaranteed by an insurer and continues for as long as you live. The amount of income you receive from the annuity is based on multiple factors, which include:

  • Your age and sex (which indicate how long you’re likely to live)
  • The amount you invest
  • What options you select (common examples are to have a lump sum benefit in the event of an untimely death, or to have income that increases with inflation each year)

As an indication, a 65-year-old male investing $200,000 in a lifetime annuity with an early death benefit and payments that increase with CPI for life may get an income of around $10,000 per year (as of September 2023).

What is a lifetime income stream?

The term ‘lifetime income stream’ encapsulates a broader range of products that let you use your superannuation or savings to buy an income that lasts for life. Lifetime annuities are a just one example of lifetime income streams. Other examples are:

  • Guaranteed lifetime pensions. These are the same as lifetime annuities but are provided by a superannuation fund not an insurer. Public sector pensions are an example of these. The government Age Pension is also a guaranteed lifetime pension (so long as means-testing doesn’t apply to you).
  • New lifetime income streams. In 2017, SIS reg 1.06A was introduced to allow a broader range of lifetime income streams, including ones that pass on the benefits of investing in growth assets whist still guaranteeing that payments can continue for life. Since 2017 at least 5 new products have been launched in Australia. An example is Generation Life’s LifeIncome product (an investment-linked annuity).

Government reviews have consistently observed that retirement incomes can increase between 15-30% by combining lifetime income products with an account-based pension. In effect, lifetime products redistribute money that would otherwise be paid as death benefits later in life. Individuals who pass away leave behind reserves that get used to increase and protect the annual incomes that are paid to all customers.

Balancing risk and reward

The idea of referencing a particular product type to inform strategy can be met with a form of skepticism from some practitioners – with comments like “you cannot do that, it’s about strategy first, not product”. Perhaps this reaction is due to unfamiliarity with the importance of annuities as a risk management tool globally and historically, or a perception that annuities are poor value for money (due to traditional annuities providing long-term investment guarantees in addition to longevity).

In the field of investments, cash is often regarded as an ‘risk-free’ benchmark for making decisions. Before investing in risky assets, investors assess the merits of taking on risk in the hope that they can do better than cash returns. Cash is used as a reference point for this decision.

Similar thinking can be applied to retirement income. With retirement income, the three main risks are: uncertain lifespan, uncertain inflation and uncertain investment returns. The asset that protects from all these is the traditional inflation-linked annuity. Retirees may be willing to take on risk in the hope that they can do better than this ‘risk-free’ income level, but it’s important to have a benchmark to measure expectations against.

In 2018, the Australian Government Actuary (AGA) proposed an Income Risk metric that can apply to all retirement products, including the account-based pensions that most super funds currently offer in retirement. The risk metric is calculated by simulating projected year-by-year payments from a particular retirement strategy under a full range of market sequences. This gets compared with a benchmark level of income up to an age where the vast majority of the population would have passed away. The results from the simulations are summed up to give a single metric that captures market, inflation, and lifespan risk at once.

If an individual wants to be, say, 90% confident that their retirement income plan will last as long as they live, then they need it to last up until the age that gives them a 90% chance of covering their potential lifespan.

Maximising retirement income (in light of risk tolerance)

The highest expected retirement income (i.e. based purely on averages) might be to invest in growth assets and draw down savings to zero at life expectancy. But we need a framework for making informed decisions and trade-offs. A possible framework is as follows:

A lifetime annuity gives a benchmark ‘safe’ level of retirement income that other strategies can be compared against. Where a strategy involves taking on some risk, this should come with sufficient reward – in a way that reflects the retiree’s risk preferences and other needs. The Australian Government Actuary’s Retirement Income Risk Measure is a good example of how risk could be measured an assessed. It involves sophisticated stress testing through a full range of market sequences that retirees might experience.

Ultimately, a long-term risk-return framework is needed when designing retirement strategies.


Jim Hennington is a consulting actuary and specialises in retirement income and strategy. He is the Founder of Apricot Actuaries and an active member of the Retirement Incomes Working Group.


October 22, 2023

Interesting article. One point missed is equity in your own home. If you have a property worth $2-3 million then in your late 80s you could sell, downsize and top up your pension. That way you can enjoy the fruits of your labour early in retirement and draw down more of your super. Why isn’t this option discussed.

September 27, 2023

Its not possible to predict your death but its more realistic to predict when your world will start to shrink as you age and become less firm - your parents health will assist with this.
Its then easier to run your private assets down and plan todepend solely on the aged pension and prior to this occurring maximise your enjoyment of your retirement funds.

September 25, 2023

"Nobody can predict how long they will live."
Voluntary euthanasia would conveniently solve the problem of longevity risk.
Imagine if we could choose our own departure date, instead of declining in health not knowing how long we'll be here for, how much we'll need, while constantly reading how we are not spending enough and causing angst for government regulators, auditors and financial advisors by dying with the majority of our savings intact.
But frugal living, or canny reinvestment of dividends, or just good luck living here and now means that for many of us our income in retirement now exceeds our income at retirement and funds in family trusts may achieve immortality, passing at our demise to the next generation.

September 25, 2023

On another note -- how about a self-funded retiree living on the dividends earnt in their SMSF being told by a credit services provider that "we do not regard Dividends as income"? Applying for credit card with a $6,000 limit, which was refused. Moral is: keep working, so you have a payslip -- keep your mortgage, so you have the statement for that -- and don't get old, just die out of the way so your wealth can pass on to those who need it more! Fun hey?

September 23, 2023

"65-year-old male investing $200,000 in a lifetime annuity with an early death benefit and payments that increase with CPI for life may get an income of around $10,000 per year":

If inflation indexed from retirement age 65, the median retiree would have a real return of:
= RATE((83.3 - 65), 10000, -200000)
= -0.90%

If not indexed:
= (1 + -0.90%) / (1 + 5%)
= -5.62%

Better off with bank term deposits.

Jim Hennington
September 25, 2023

Hi Dudley,

If I've understood correctly, you've assumed the person stops needing income (i.e. dies) at exactly age, 83.3. That might not be an appropriate planning horizon for most retirees in 2023.

An average 65 year old male now has a 70% change of living past age 84 [1]. I.e. 7 out of 10 would live longer than your calc allowed for.

If he wants a high degree of confidence that his retirement plan will cover his whole (unknown) lifespan then he'll need an income that can last for 34 years, to age 99. Only one in 10 retirees like him will live longer than 34 years.

The calc comes from a lifespan planning tool we built for the SMSF Association [2]. It also lets people personalise the calc based on their health, lifestyle, wealth and confidence level required.

To be able to last for 34 years, the real return in your calc would change to 3.4% real return. So term deposits couldn't deliver the confidence desired - for people who are risk averse.

[1] Australian Life Tables 2015-17 with allowance for mortality improvement using the 25-year rates
[2] Lifespan calculator:

September 25, 2023

"An average 65 year old male now has a 70% change of living past age 84 [1]. I.e. 7 out of 10 would live longer than your calc allowed for.":

From your figure 1, the median (not average) age of death is 83 + a tidge [And increasing 0.1 to 0.2 year per year.]:

A 65 year old with <= $200,000 can claim the Age Pension. For a home owner, the investment yield is immaterial icing; the cake is:
= 200,000 / (83.3 - 65)
= 11,000 / y.

"high degree of confidence that his retirement plan will cover his whole (unknown) lifespan":

Reduce expenditure to less than Age Pension.

For a few, shovel up a great pile and spend no more than equal to Age Pension:
Minimum real return required is negative:
= RATE((99.0 - 65.0), 41704, -5000000, 0, 0)
= -6.0%
Then both term deposits and annuities will do.

September 23, 2023

"‘Retirement income’ ... superannuation assets, it’s likely to mean the amount drawn down out of your superannuation fund and paid into your bank account to spend.":

Which would make it retirement capital, unless wanting to define it as income then tax it.

Jim Hennington
September 26, 2023

100% agree.

It's a bit shocking that super funds are allowed to market account-based pensions as providing "a regular stream of income in retirement" when they're just making withdrawals from your own capital - especially the amount can move up and down and stops when your balance runs out.

Graham W
September 27, 2023

Agree also Jim. As my wife and I are now in our seventies, running out of money seems to no longer such a major concern. As a retired professional managing our SMSF, funds outside super and possible Centrelink access is not an issue for me. My wife is not interested much in finances. So I believe the most important factor for us as we age is to have easy management of our affairs. That is why I am looking at a Lifetime Annuity in my wife's name and getting some Centrelink pension. This certainty of income, maintaining a decent level of funds outside super means that she will have no cashflow concerns if I predecease her. The SMSF can be wound-up in good time. If I have sufficient warning of my demise I will close the SMSF and get easy to manage term deposits for her.

Nearly retired super fund investor
September 27, 2023

Jim and Dudley - so what?

I sort of agree in a technical sense that withdrawing capital isn't strictly speaking 'income'. But it's common in the industry - not just the marketing departments of super funds - that the regular cash flow that retirees draw from their super is their 'income' at that stage of life. I mean the Government and its regulators APRA and ASIC introduced in 2022 the Retirement Income Covenant along these very lines.

And that's what super has been all about since it became something that all of us have. Put some of your income aside today and all through your working life, invest it to grow it, then gradually withdraw it to spend it when you retire. It was your income, which you temporarily turned into capital, and now that you draw on it what the heck does it matter whether it's called income again or not?

You guys are making a mountain out of a molehill.

September 27, 2023

"what the heck does it matter whether it's called income again or not?":

'define it as income then tax it', plenty suggesting it, including those whose withdrawals are not currently taxed.

Then molehill becomes Mountain.

Define bank account withdrawals as income and tax 'em?

Daryl Saal
September 22, 2023

In my case, I'm fortunate enough to have several household income streams. The basis is an indexed defined benefit of about the minimum wage. Allied to that we have a couple of rental houses, and an industry fund in pension phase.
The point I am laboriously trying to make is that because we are secure in the other areas, I can be a bit more adventurous with the industry fund. Currently in a balanced account, but has been shifted around over the years. I snagged the GFC, moving into cash just before then out a month before the up turn.

September 22, 2023

There is a significant opportunity cost with taking out a lifetime annuity given the embedded IRR. You'd want to very confident of living at least 20 years post-retirement to recovery your initial capital. An analysis on anti section risk under the RIC would be a worthwhile exercise.

Still not clear cut to me if longevity risk is really just something the industry is more focused on solving for its own benefit given the majority of retirees can continue lean on the best longevity policy available (the Age Pension)

Jim Hennington
September 22, 2023

Hi Denial,

Interesting that you seem to love the Age Pension but are sceptical of longevity products. They are similar ! Both solve longevity risk.

I agree the Age Pension is a great form of longevity risk protection. But it's about a quarter of AWOTE for singles - whereas the old rule of thumb with retirement is to replace 2/3rds (or at least half) your salary. So peole need good ways to bridge the gap between the Age Pension and a comfortable retirement for life.

Out of interest:

The probabiliy a 60 year old male dies within 20 years only about 20%.
The probability a 60 year old couple BOTH die within 20 years is about 3%.

These figures are based on the Australian Life Tables (i.e. designed to cover the whole population) and include the 25-year improvement rates. Healthy, wealthy people with good lifestyles tend to live longer than average.

September 22, 2023

Thanks and agree but longevity products provide significant restrictions on your capital with a substandard IRR so you're only really getting certainty. Most won't and don't want to pay this tradeoff for certainty for a valid reason. My contention is it's not just from a lack of education or access to professional advice.

Jim Hennington
September 22, 2023

Denial - just out of intelectual curiosity/debate...

...doesn't the Age Pension provide significant restrictions on your capital (i.e. the taxes you paid to fund it) with a substandard IRR?

I've never heard anyone say they'd like to cash in their Age Pension for a lump sum.

September 23, 2023

The IRR of the Age Pension is infinite; free money, no capital required, no work required.

"quarter of AWOTE for singles":
Net: 95,607 - 23,451 = 72,156

Age Pension + earnings:
Net 26,065 + 7,020 - 0 = 33,085

Ratio: 45%.

September 24, 2023

AWOTE net: 72,156

How much must be saved, net of taxes, to provide capital returning the same as Age Pension + earnings (net 33,085) where net real yield / return is 2%?:

= PMT(2%, (65 - 25), 0, (72156 - 33085) / 2%)
= -32,342

Which as % of difference between the AWOTE and Age Pension nets is:
= 32,342 / (72156 - 33085)
= 83%

Graham W
September 25, 2023

Assuming the $200,000 was lodged in a Lifetime Annuity there is only 60 percent assessment by Centrelink under the Asset test and only 60±% of the income under the Income test. The reduction of $80,000 under the Asset test provides a pension, possible or increase of $6,240 pa. I think that this makes an overall return of 3.1% to consider. Amounts of 1,000 over the Asset test lose $3 a fortnight in pension or 7.8%.

Jim Hennington
September 25, 2023

Good point Graham W,

For people impacted by means testing, there are some important strategies to be aware of - to make use of those Centrelink incentives.

The original Framework to Maximise Retirement Income paper (on the Actuaries Institute website) also points out that:

With a lifetime income product ...." under Centrelink means testing rules, the cashflow pattern of Age Pension income is steadier over the course of retirement than for an account-based pension. A problem with account-based pensions under the means test rules is they can result in an Age Pension that is low in the early years
of retirement and higher later as the person’s assessable assets reduce over time. This does not
necessarily apply to a lifetime income product in the same way. "

Jim Bonham
September 21, 2023

Jim, thanks for this article.

“With retirement income, the three main risks are: uncertain lifespan, uncertain inflation and uncertain investment returns”.

Sure, these are all important, but legislative risk is arguably the elephant in the room (think of the halving of the age pension asset taper rate a few years back; the advent of the transfer balance cap; the inclusion of unindexed thresholds for the Div 293 tax and for the proposed new tax, etc etc).

How can you incorporate legislative risk in your model?

Jim Bonham
September 21, 2023

Sorry, senior moment: the taper rate was doubled, not halved.

Jim Hennington
September 22, 2023

Yes, that's an excellent question Jim and one that gets debated in actuarial working groups.

Some modellers prefer to assume that current laws won't change - as that's what's legislated. But I'm personally not 100% comfortable with that. You are right that legislative change is a risk.

My preferred approach is to test some extremes to build awareness of what a worst case looks like. e.g. what would the results look like if there were no Age Pension, or the rate was halved..... But it's appropriate to be pragmatic (a government that penalised pensioners might lose a lot of votes). I tend to then focus on scenarios that err on the side of caution. e.g. assume the Age Pension payment rate increases a little less than legislated.

Ultimately this quote is appropriate: "All models are wrong but some of them are useful"

Jim Bonham
September 22, 2023

Thanks Jim.

It would be easy for the government to protect retirees from adverse legislative changes, simply by re-establishing the principle of grandfathering.

The more insidious effects of inconsistent (or no) indexing of critical parameters can also be easily fixed by the government, although that is extremely unlikely in the short term.

Perhaps the large funds should lobby the government to deal with these risks, as part of their response to the RIC?

September 21, 2023

Shouldn't a discussion of annuities address the credit risk associated with relying on the solvency of a single insurer?

With superannuation we have a trustee structure and credit risk spread over a diversified investment portfolio, and with cash we have a government guarantee of deposits.

September 21, 2023

Absolutely right, TonyD, especially since some of these annuities are supposed to run for a lifetime, maybe 30 to 40 years. A lot can happen to an issuer in that time.

Jim Hennington
September 22, 2023

Agreed TonyD, even insurance companies aren't perfectly risk free. This topic deserves its own article. Watch this space.

David Williams
September 21, 2023

Thanks Jim. Really useful insights. Even considering all these factors, a major variable remains in play which can be much more involved in making a difference – the person. Although you rightly assert ‘nobody can predict how long they will live’, there is plenty of evidence to show each person can make a significant difference to their life outcomes through informed choices, and have a workable sense of how long it may be.
This is the role of personal longevity planning – empowering each person to make informed choices and then use their individual potential outcome as a basis for their investment and other life strategies. This framework can easily be adapted to changes that occur, to seek out the ‘best’ approach under each person’s circumstances. It’s not rocket science and is far less complex than the financial strategies that only the gifted really understand.
People need more insights into how to balance the negative impact of ‘longevity risk’ against the many ongoing opportunities in a longer life – working longer in satisfying work, confidence in their experience and capabilities to make good decisions, the ability to put more back than they take out of society for much longer than they ever imagined, all framed by a greater sense of control.
Just think – the older Boomer at 77 has already been around nearly ten years longer than predicted at birth, and a third of them are still likely to be around close to 90, often still independent. Everyone from midlife needs to be encouraged to remain productive and self-sufficient for as long as possible if we are not to be overwhelmed by the gloomy economic consequences of the latest Intergenerational Report.
I applaud your work, Jim. it’s necessary but not sufficient to make the best of our longevity bonus.


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