Drawing an income in retirement

How long will my super last? It’s the second question most people ask – right after ‘How much super do I need?’ And it can be a difficult one to answer, because retirement rarely comes with a set price tag. There are a lot of variables, such as:

• How long will you live?
• How will investment markets behave? 
• How might your spending needs or circumstances change?

We know it can feel overwhelming and a bit scary for people to try to anticipate their needs in retirement. But many retirees are better placed than they think once they understand how their super can work in retirement alongside the Age Pension and other factors.

Our new retirement income drawdown calculator is designed to help you manage your retirement income, and anticipate different scenarios, with confidence.  

There are several ways to access your super in retirement, from withdrawing a lump sum, to creating an income stream from your super – whether that be a transition-to-retirement strategy, an account-based pension or an annuity or lifetime pension – or some mixture of the above. 

But once you’ve retired, it’s important to understand how to manage the amounts you’re withdrawing over time so you can have confidence your super will last.

You could be retired for 30 years or more. If you’ve never modelled how long your money could last, here are a few things to keep in mind.

The four main things that usually affect how long your money could last are:

• Your balance,
• How much you withdraw (and when you withdraw it),
• Your investment returns, and (for many people)
• How much Age Pension you receive.

These are precisely the things our retirement income drawdown calculator takes into consideration. It does the sums to present you with an easy-to-understand annual income amount and projection for how long your money could last, based on the information you feed in.

The calculator makes some key assumptions about inflation and investment returns, such as investing your super at a return of 6.7%. But you can change these if you want to invest your money more conservatively, or if you are prepared to take on a little more risk in exchange for potentially higher returns.

What else should you know when you’re planning how to manage your money in retirement? If you’re concerned about spending more than the bare minimum, consider the following:

Switching from saving for retirement to spending in retirement can feel uncomfortable, even though your balance might be doing exactly what it was designed to do.

In other words, super is not meant to be a nest egg to be protected indefinitely. It is intended to help fund your life after work.

The lesson here is not that everyone should spend more; but that it’s important to understand what your savings may reasonably support instead of allowing fear alone to set your budget.

Account-based pensions have minimum annual withdrawal requirements. For people aged under 65, the minimum drawdown rate is currently 4% of the account balance. It rises to 5% from ages 65 to 74 and increases progressively as you age.

This is a regulatory requirement, not a recommendation about how much you should spend.

Depending on your balance, planned lifestyle, Age Pension entitlement, investments and other resources, you may be able to draw more. 

Alternatively, if you want to preserve a buffer, or if you have substantial income outside super, the minimum may be enough.

Experimenting with different withdrawal strategies can help you understand the longer-term effect on your balance before you change your pension payments.

If you need more help, CFS can also connect you with a range of advice options, from free general advice to one-off consultations on retirement planning, or more complex, comprehensive financial advice. Explore your advice options 

Before experimenting with the drawdown calculator, think about how much super you may need based on what you expect to spend in retirement.

You may consider things like:

• Your current household budget
• Whether your mortgage, commuting and takeaway lunch expenses might decrease
• Will your travel, hobbies, home maintenance or health insurance costs increase?

One way of estimating your spending can be to separate your spending into three categories:

• Essentials, such as food, utilities, insurance, transport and healthcare
• Lifestyle spending, such as travel, dining out, hobbies and entertainment
• Occasional costs, such as replacing a car, renovating your home or helping family

This may provide a more realistic annual income target than, for example, assuming you will need a fixed percentage of your salary. 

Once you have an idea of how much super you might need, you can start modelling how long it might last.

To help you model different scenarios, the CFS retirement income drawdown calculator will ask you to enter relevant information.

When you use the calculator, you’ll be asked to enter things like:

• Your age
• Your pension or super balance
• If you have a partner – and if you do, their age and super balance.

Then you’ll be able to include:

• If you have any assets outside super
• If you own your own home, and 
• Whether you earn any form of income from casual or part-time work in retirement.

Finally, it will ask how you would like to calculate your retirement income, either:

• Based on making your money last until a particular age (say, age 92), or
• By setting a yearly target income and seeing how long it lasts.

The projection will change depending on what you enter – such as whether you work part-time, the age at which you retire, whether you are part of a couple, or if you include income from another source, such as an inheritance or investment.

The calculator will generate a chart that shows you what your annual income might be given the information provided. Note that it provides an estimate based on the numbers you enter and the assumptions that are part of the calculator. It is not designed to be a definitive projection. 

The chart will include:

• Your current balance
• Your estimated yearly income in retirement
• The proportion of your annual income each year that might be provided by your super
• The proportion of your annual income each year that might be provided by the Age Pension (if applicable).

 
It can also show you how your balance might be expected to decrease over time. You can adjust the outcomes by altering:

• Your retirement age 
• Whether you work part-time or not
• How your money is invested, and
• How your spending might change if you were to include a holiday, for example.

It’s worth experimenting with the figures you enter and seeing how different decisions might affect your predicted outcomes, prior to making your own retirement income drawdown plan. 

The following examples are illustrative only and are designed to highlight what you might explore in the calculator.

Hannah is 66, single and about to retire. Her home is paid off, and she has $420,000 in super.

She starts by using the Association of Super Funds of Australia-recommended benchmark for a comfortable lifestyle ($55,923 per year or $1,071 per week) and enters her super balance to see when it would be likely to run out (using the standard assumptions within the calculator).

Hannah can see from the below projection that an Age Pension payment, included from age 67, could supplement the income from her super for most of her retirement.

Michael, 67, has retired, while David, 63, plans to work part-time for another three years. They have combined super of $650,000, a small investment portfolio and no mortgage.

They include both partners in the calculator and test what happens when David’s employment income stops. They also explore how their potential Age Pension eligibility may change as David reaches Age Pension age and their assessable assets change.

This gives them a household view rather than treating each super balance in isolation.

Aisha is 69 and retired two years ago. After a period of market volatility, she is concerned that her $510,000 pension balance will not last.

She reruns her projection using her current balance and updated spending. She tests a modest reduction in discretionary spending and compares different investment-return assumptions.

While this exercise does not remove market risk, it helps Aisha understand whether a short-term market move materially changed her long-term position before she makes a major decision.

How your money could last in retirement may change over time, so it’s worth asking the question, and testing different outcomes, more than once. 

Your projections may change as investment markets move, your spending evolves, your home and family circumstances change, and your Age Pension eligibility increases or decreases.

Try it now, and feel free to run it again whenever something significant changes.

You may discover that you need to adjust your spending plans. But you may also find that you can afford to spend a little more in the years when you are most active and able to enjoy it.

Either way, having a clearer picture can provide you with the reassurance you need to approach retirement with more confidence.

A final thought when it comes to how well your money might last in retirement: lifetime pensions or annuities that provide a guaranteed income for life may provide another level of reassurance if you’re worried about running out of money later in retirement.

In fact, some modern lifetime pension products are assessed more favourably by Centrelink under current means-testing rules and may result in higher Age Pension payments. 

Learn more about how this works

Use the CFS Retirement Income Drawdown Calculator to estimate how your super, investments, other income and potential Age Pension entitlement could work together throughout retirement.