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How to help people with retirement spending decisions

It is becoming routine to quote Nobel Prize Winner Bill Sharpe in saying that decumulation (determining how much you can regularly and sustainably withdraw from your pension assets) is “the hardest, nastiest problem in finance.”

From a finance perspective, decumulation is so difficult because there are two huge and separate uncertainties involved: how long you will live, and what return you will earn on your retirement assets. Each causes great uncertainty; and yet we have to cope with both. To the mix add the negative psychological effects of all that uncertainty; like confusion, stress and fear of running out of money, and we can easily find the whole prospect too daunting to deal with.

On the positive side, the finance sector has found a reasonable approach to helping people with accumulating retirement assets; that is, setting aside money and deciding how to invest it. It’s a much simpler issue to deal with than decumulation.

There’s still the uncertainty of what exactly investment returns will turn out to be during the accumulation phase. But the time horizon is more forgiving in its impact. Not only do we typically have some ability to control the end date (retirement), but if we postpone it the money tends to continue growing anyway. And we can even keep the investments going after we retire, so all in all, the impact isn’t determined by a single date or event.

Gliding to retirement

One reasonable solution to the decumulation dilemma is to create what has become known as an investment glide path, for which the goal is to give growth-seeking investments time to grow (and time also to overcome temporary setbacks), reducing the growth exposure as we draw nearer to the prospective retirement date (after which there is still usually sufficient time available for the hoped-for recovery if the risk of a sudden investment decline eventuates).

This approach has become so popular that it is frequently offered as the default option with many super accumulation plans, and worldwide roughly 90% of participants go with this default. It saves people who may not feel confident enough (or possess sufficient financial literacy) to make an investment selection from having to do so.

Now compare that with the issues involved in the retirement, or decumulation, phase. While the time horizon for accumulation is known within perhaps a few years, the time horizon for decumulation has a much larger margin of uncertainty – it might be very near or it might be more than 30 years away. This magnifies the effect of investment uncertainty.

Little wonder an unfortunate rule of thumb has developed that the only way to ensure a pension pot doesn’t expire before you do is to never ‘eat capital’ at all – the idealised outcome being to only live on the income produced.

Framing retirement choices appropriately

As with the rest of the world, Australian Baby Boomers started to reach age 65 some 10 years ago and are now retiring in very large numbers. But, by and large, they have no idea what to do with their accrued superannuation benefits. The Australian government is commendably taking a lead on assisting new retirees and is planning to make trustees of super funds offer guidance to retiring members via the Retirement Income Covenant requirement that commences on 1 July 2022.

Problem solved? Not quite! That’s because, as I understand it, the government appears to be emphasizing member choice over default options. Given that default options are not only the norm, but indeed a popular norm, for accumulation, surely the case for default options in decumulation is even more compelling.

I’m not saying that creating default options will be easy – far from it, it will be much more difficult than for accumulation, – but telling members “we’re giving you choices, but beyond that you’re on your own, and we wish you the best of luck” hardly seems constructive.

What sorts of choices would be useful? Well, choices are needed at two levels.

The first and most basic level has nothing to do with the financial technicalities; it simply deals with a member’s attitude. As I expressed the choices in Walk 2 of my Life Two book, this might be:

  • Do it for me; in other words, assign a default option to me.
  • Do it with me; in other words, help me to combine my own knowledge (of my situation and my goals) with your technical expertise. In turn, this could involve another choice:
    - Once you know more about me, assign an option to me.
    - Once you explain the options to me, I’ll make the choice myself.
  • I’ll do it myself. And in turn that could mean either of these:
    - Refer me to a financial planner.
    - I’m capable of doing everything on my own.

I understand that in Australia there are also members who are totally disengaged, and do not respond to anything related to their superannuation assets – special provisions will need to apply to them.

Horses for courses

That’s the first level of choices. The second level is the more technical one of actually having explicit default options.

Why do I suggest options (using the plural) rather than a single option? Because it isn’t possible for a single approach to suit everyone – otherwise “the hardest, nastiest problem in finance” would have been solved by now.

What are the complexities that make this so difficult? Partly it’s because, as aforementioned, there are those two separate issues to deal with; uncertain investment returns and uncertain longevity. But there’s another fundamental dimension, and that is to accommodate multiple goals that members probably have.

What’s more, members’ superannuation assets are usually only one part of their total assets. They may have a home, other physical assets, other investments, bank accounts, and so on. It’s a plan for the aggregate assets that’s really needed, and what to do with the super assets needs to fit in with the overall plan. That plan may need to be for the member alone, or for the member and partner as a couple, in which case two sets of assets and joint assets need to be included.

Those multiple goals I referred to could include, for example:

  • How do your plans for your own lifestyle interact with your bequest motives?
  • How much of your super do you need to finance your own lifestyle?
  • Are there certain aspects of your lifestyle that you absolutely want to lock in for as long as you live, with total certainty, to enable you to sleep at night?

There are other relevant questions, as you can imagine, but these are enough to illustrate that there isn’t likely to be a one-size-fits-all solution.

Toward a smoother landing in retirement

To conclude: it’s not enough to identify products and services (and financial planners) and then list them. It is also not enough if these lists are given to members with insufficient explanation and context about how to use them.

It is absolutely essential to ask members about their attitudes, per the first set of bullet points above. And to have a default option specified for each of the various combinations of sets of answers to questions in the (possibly extended) second set of bullets, so that those members who say “Do it for me” can be assigned to the relevant default option. Given the discussion earlier, I’m certain that many retirees will want a default either to be assigned to them or to be guided towards.

I have no doubt that we’ll learn from experience and see which attitudes and sets of circumstances dominate, and which new products and services become available, so that trustees can refine the choices they offer. That’s inevitable, and all to the good. But default options are an essential part of the solution.


Don Ezra, now happily retired, is the former Co-Chairman of global consulting for Russell Investments worldwide, and the author of “Life Two: how to get to and enjoy what used to be called retirement”. This article is general information and does not consider the circumstances of any investor.


[Guest Editor’s Note: It should be noted that under the proposed Retirement Income Covenant requirement that commences on 1 July 2022, super fund trustees will be required to develop retirement income strategies for their members, whether one for all members, or differentiated strategies for different retiree member cohorts.

A recent Treasury consultation paper on the issue suggests that where a cohort approach is adopted, trustees might look to factors such as super balance, expected entitlement to the Age Pension, partner status, home-ownership status and the expected age of drawdown commencement.]


November 15, 2021

One relevant challenge is that many decumulation products require that you lock in until you die. However this area continues to develop and change and it's unlikely that the best option now remain will still be the best option in future. Therefore there is justified hesitancy in taking up one of these options.

November 14, 2021

I find it odd that the first part of the hardest, nastiest problem is still such a complete mystery. is it still to much of a taboo? How long do I have to live? This might have been harder a generation ago, but with the recent emergence of smartphones, wearbles, AI and advances in medicine and our understanding of disease and our ability to predict outcomes, I can get a pretty accurate line of sight on how long I might have. Is there an issue with the industry that seems to mean it clings to a one-size-fits-all solution that ends up not really working for anyone.

November 13, 2021

The intrusive and prescriptive retirement income covenant should not be made applicable to two member SMSFs. It is ludicrous for me as a trustee to have to prepare such a strategy for me as a member. The investment statement is also an unnecessary impost, required of SMSFs but existing solely as a generic document prepared by accountants doing annual returns and ticking all boxes. SMSFs should be articulating strong opposition to further government regulations and controls on our own savings, investments and decisions. The strength of feeling was evident when this covenant was recently discussed on this forum during the Treasury consultation period and generated some personal submissions. Hopefully submissions from SMSFs will balance the self serving submissions in support coming from industry who obviously saw ways to profit themselves from these proposals.

November 11, 2021

Don , thanks for another "thought provoking article" and an opportunity for you to sell your ideas and YOUR BOOK !
You quote Nobel Prize Winner Bill Sharpe in saying that "decumulation (determining how much you can regularly and sustainably withdraw from your pension assets) is “the hardest, nastiest problem in finance.”
It is a PROBLEM that we would all love to have Don ! Accumulation IS THE REAL PROBLEM for most of us !
I'd like to quote President Ronald Reagan who once said, “The nine most terrifying words in the English language are:
I’m from the Government, and I’m here to help. “......AND THAT sums up the "proposed Retirement Income Covenant " in a
nut-shell ! Australian retirees have NO PROBLEM determining their own "decumulation" at their own CHOSEN RATE and in their own CHOSEN MANNER .
The bureaucrats though , who are NOT the least bit concerned about the "retiree" , have a very different AGENDA ;
it is ALL ABOUT THE RETIREE'S MONEY and how the bureaucrats can get "THEIR HANDS ON IT" !
I am NOT persuaded that all this "compassion" is either genuine or helpful. I think it is a subterfuge designed to distract and
mislead [ like any good magician] while "they" purloin something that they deem to be in their purview , even if they have to
change the legislation to obtain it ! I merely ASK to be LEFT ALONE to my own devices , I neither want nor desire this
most unwelcome "pseudo-compassionate" interference by government.

David Russell
November 10, 2021

Please keep contributing Don. Your insights are interesting, thought provoking and different from the run of the mill

November 10, 2021

For two already retired people with their own SMSF ticking along quite OK, not receiving any Government Pension entitlements and with a clear picture of income needs and how to meet them, this is just another administrative impost for us. If we planned to take other younger family members in, fair enough, and I quite agree that the confusion around "how do we make our money last" needs to be addressed, but do all Super Funds need to be caught up in the action or will very small Funds be given the chance to opt out?

Harry Chemay
November 10, 2021

Hi June, thanks for your question. The Treasury consultation paper suggests that the need for a Retirement Income Strategy (RIS) will apply to all trustees (but not SMSFs based on the latest announcements). But do note that there is no draft legislation yet, so we'd have to wait to see what's being proposed in any Bill implementing it. What I will say is that the RIS should probably be seen as something akin to the Investment Strategy requirement for every SMSF. Hope this helps, but stay tuned for the draft Bill, which needs to be introduced, debated and passed in good time for a (proposed) 1 July 2022 start. Harry

Harry Chemay
November 14, 2021

Erratum: I have been reliably informed that the draft Bill to implement the Retirement Income Covenant has already been released. I have now reviewed both the Exposure Draft for the Bill (Treasury Laws Amendment (Measures for a later sitting) Bill 2021: Retirement income covenant) and the related 'Exposure Draft Explanatory Memorandum'.

It is clear from these that the need for SMSF trustees to formulate a retirement income strategy has been dropped, compared to the position taken in the Treasury consultation paper. It would appear that feedback from the SMSF sector as to the appropriateness of the RIC was accepted in formulating the position in respect of SMSFs.

November 10, 2021

The default retirement 'product' for the vast majority of Australians is the Age Pension and Principal Place of Residence (home). Invest all but SweetSpot Age Pension Assessable Assets of $405,000 in home and receive Age Pension of $37,924 / y tax free for life plus SweetSpot income of $8,320 / y tax free plus ~6% / y home capital gains tax free. More than $2 million invested needed to exceed that.

November 11, 2021

I understand the mathematics, and to some extent, the thinking behind the SweetSpot strategy. But I'd add that for people in accumulation mode it is a difficult bullseye to hit precisely.
A less precise strategy it to aim above this amount, without becoming Scrooge, and decide what to do with the excess closer to retirement based on rule changes and goals eg renovate, upsize, travel, or just generally live the high life until you reduce your asset to the sweet spot.
Or if you overshoot by too much, due to lucky investments, inheritance , or draconian threshold reductions, you may decide to become a fully self funded retire.
Just a thought, not advice.

November 11, 2021

"people in accumulation mode it is a difficult bullseye to hit precisely":

Those parents with congenial progeny willing to share home with progeny have additional flexibility. The Progeny receive tax free, rent free, accommodation, possibly improved for the purpose. Parents receive goods and services free, possibly including mortgage payments. Or progeny can maximise super confessional contributions. Progeny inherit a home tax free.

November 12, 2021

Hi Dudley and Rodney ! I agree with Dudley's deadly diagnosis and also with Rodney's reluctant reaction ! When we start out ambitiously in life accumulating assets by "spending less than we earn" [ saving , in other words ! ] none of us set-out to either "die-broke" or "die-wealthy" or "con the tax man" in the process. "Sufficient" is "our goal" for retirement , nothing greedy or 'entitled' in that ambition surely !? But then "the powers that be" continually change the rules and revamp the regulations , almost always adversely for us, so setting "a precise target" becomes an impossibility. So most of us aim higher and accumulate more than is probably necessary.....but because we have been deceived so often , we don't feel safe unless we have an excess stowed away for future security! Then bureaucrats attack what is really the reward for frugality and prudence and bloody hard work even though everyone had the same opportunities in life that we had. They establish a review and use its findings to revamp the Rules and Regulations and legislate "their view" into law.


November 13, 2021

Or perhaps you retire with more capital to play with and spend on a more enjoyable retirement with the knowledge that eventually I will have a safety net ‘sweet spot’ courtesy of the government but not being as reliant on Centrelink for the whole of my retirement. While you live off about $46k pa this alternative could give you much more for many years before you have to dial back your lifestyle to match the sweet spot income.

November 10, 2021

Insurance companies have for centuries tackled the longevity risk very simply, by pooling the funds of large numbers of people and using actuarial data to calculate likely payouts etc. This is the key I believe, pooled risk is the ONLY way to deal with the first uncertainty of how long you live. The second problem of returns is attempted to be addressed by annuities but the key weakness of these is the need to be so ultra conservative (fixed interest largely) to avoid losses exceeding capital at some point in the future to make the returns miserly and largely unattractive. So people/super funds take on more risk than annuities are allowed to. Surely there is a middle ground? If we can cover the possibility of large market falls wiping out capital then we can include more risk and a more acceptable return. The only way I can think of this is to have a govt guarantee that the capital base of the annuity provider has a safety net. Of course excessive risk (to be defined) needs to be avoided but with pitiful cash/fixed interest returns for the foreseeable something needs to be done to make annuities more appealing. So, annuity products with "balanced" super income/returns would make most of us sleep much better. Once you lose the "what if my money runs out" fear life is alot less stressful.

November 13, 2021

"annuity products with "balanced" super income/returns would make most of us sleep much better"

These are already beginning to appear. QSuper Lifetime Pension is one example of exactly that.

jeff O
November 10, 2021

Agree We continue to pool most people in default options and cohorts for retirement/lifesetyle advice - presumably to deliver efficiently the costs of advice and keep implementation costs low as well as to mitigate the need for access to some low quality high cost self interested advisors. When it comes to life changing medical/health plans, we do not sit every patient in the hall/on zoom and hear the specialist medical advisor provide general or personal advice. Now there is DR Google.....telehealth, face to face with the GP.....and many specialists ....before we find the tailored life saving cancer treatment for each patient etc We need to digitise advice for single issues and potentially to deliver default holistic plans - and then leave it to the retiree to decide when to opt in or to seek more detailed tailored advice.

Russell (a veteran adviser)
November 10, 2021

Given a financial planner's legal responsibility to consider the wider implications of their advice (FASEA Code of Ethics Standards 5 & 6), how can a Super fund legitimately "do it for me'" without consideration of same?


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