Retirement Income Strategies: How to Make Your Super Last Throughout Retirement

After decades of accumulating superannuation, the transition to retirement brings a fundamental shift from saving to spending. How you draw down your super can significantly impact how long your savings last and the quality of retirement lifestyle you can maintain. This guide explores the key retirement income strategies available to Australians and how to structure withdrawals for sustainable retirement income.

Understanding the Retirement Income Challenge

The challenge of retirement income is essentially a problem of uncertainty. You do not know how long you will live, what investment returns you will receive, what inflation will do to your purchasing power, or what unexpected expenses you might face. A strategy that is too conservative might leave you with unspent savings at the end of life, while one that is too aggressive risks depleting your funds before you die.

Australian retirees have access to a unique three-pillar retirement income system: the Age Pension provides a safety net, superannuation provides the core of funded retirement income, and voluntary savings and home equity provide additional resources. Effective retirement income planning considers how to integrate these components to maximise lifetime income while managing the risk of outliving your savings.

Account-Based Pensions

The most common way to draw retirement income from superannuation is through an account-based pension, also known as an allocated pension or retirement income stream. Once you meet a condition of release, typically retiring after reaching preservation age, you can convert your super accumulation account into a pension account and begin receiving regular payments.

Account-based pensions offer significant tax advantages. Investment earnings within a pension account are completely tax-free, compared to the 15 per cent tax on accumulation account earnings. For those aged 60 and over, pension payments are also tax-free, regardless of the amount. This tax-free environment for both investment earnings and withdrawals makes pension accounts highly efficient for retirement income.

Minimum annual drawdown percentages apply to account-based pensions, starting at 4 per cent for those under 65 and increasing with age to 14 per cent for those 95 and over. These minimums ensure that super is used for retirement income rather than preserved indefinitely. There is no maximum withdrawal limit, so you can access as much of your balance as you need at any time, though sustainable drawdown strategies typically suggest limiting withdrawals to preserve capital for later years.

The Four Per Cent Rule and Sustainable Drawdown

A commonly cited guideline for sustainable retirement withdrawals is the four per cent rule, which originated from US research suggesting that withdrawing 4 per cent of your portfolio in the first year of retirement, then adjusting for inflation each subsequent year, provided a high probability of funds lasting 30 years. However, this rule was developed based on historical US market returns and specific portfolio assumptions that may not directly apply to Australian retirees.

Australian researchers have suggested that sustainable withdrawal rates may differ due to our different market conditions, longevity expectations, and the interaction with the Age Pension. Some analysis suggests slightly higher sustainable rates may be achievable in Australia, while others note that current lower interest rate environments may require more conservative approaches. The appropriate rate for you depends on your specific circumstances, including your total wealth, risk tolerance, and desired lifestyle.

A practical approach is to start with a conservative withdrawal rate of around 4 to 5 per cent and adjust based on investment performance and remaining life expectancy. If markets perform well and your balance grows, you can increase withdrawals. If markets decline, reducing withdrawals temporarily helps preserve capital for recovery.

Transition to Retirement Strategies

Transition to retirement (TTR) strategies allow individuals who have reached preservation age but are still working to access some of their super while continuing to make contributions. This can be used to reduce work hours while supplementing income from super, or to boost super savings through salary sacrifice arrangements funded by TTR pension payments.

The tax effectiveness of TTR strategies has been reduced since July 2017, when investment earnings in TTR pension accounts became taxed at 15 per cent rather than being tax-free. However, TTR can still be valuable for those genuinely transitioning to part-time work and needing income supplementation, or for managing taxable income levels in specific circumstances.

If you are considering a TTR strategy, model the tax implications carefully. The strategy that was optimal before 2017 may no longer provide the same benefits, and alternative approaches such as simply salary sacrificing without a TTR pension may be more effective in some cases.

Integrating the Age Pension

The Age Pension provides a foundation of retirement income for most Australians, though it is means-tested based on both assets and income. Understanding how your super and other assets affect your Age Pension entitlement is crucial for effective retirement income planning.

Under current rules, the family home is exempt from the assets test, which significantly advantages home-owning retirees. Superannuation in accumulation phase counts under the assets test once you reach Age Pension age, while account-based pensions are assessed under both assets and income tests. The deeming rules assume your financial assets earn a specified rate of return regardless of actual returns, which can work for or against you depending on market conditions.

For retirees with moderate super balances, optimising the interaction between super withdrawals and Age Pension entitlements can significantly increase total retirement income. This might involve spending down super strategically to move onto the pension earlier, or structuring assets to minimise means test impacts. Professional financial advice can help navigate these complex interactions.

Annuities and Guaranteed Income Products

For retirees seeking guaranteed income regardless of market performance, annuities and other guaranteed income products provide certainty in exchange for reduced flexibility. A lifetime annuity pays a fixed income for as long as you live, eliminating longevity risk but typically at a cost of lower total returns if you die early and no remaining capital for beneficiaries.

Combining account-based pensions with annuities can provide both flexibility and security. For example, you might use an annuity to cover essential expenses like food, utilities, and housing costs, while using an account-based pension for discretionary spending that can be adjusted based on market conditions and personal circumstances.

The Australian government has introduced incentives for retirement income products that manage longevity risk, and new products are emerging in the market. Consider whether guaranteed income products might suit your needs, particularly if you are highly risk-averse or lack other sources of guaranteed income beyond a limited Age Pension.

Sequencing Risk and Retirement Timing

Sequencing risk refers to the danger that poor investment returns early in retirement will deplete your savings faster than expected, even if long-term average returns remain normal. A retiree who experiences a major market downturn in the first few years of retirement faces worse outcomes than one who experiences the same downturn later, because early losses reduce the capital base that must generate future income.

Managing sequencing risk involves several strategies. Reducing portfolio volatility in the years immediately before and after retirement limits potential drawdowns. Maintaining flexibility to reduce withdrawals during market downturns preserves capital for recovery. Holding several years of expenses in cash or conservative investments allows you to avoid selling growth assets at depressed prices.

If you are approaching retirement during a period of market uncertainty, consider whether delaying retirement by a year or two might reduce sequencing risk. Alternatively, a more conservative asset allocation in the first few retirement years, with a gradual increase in growth assets later, can help manage this risk. Use our superannuation calculator to model different retirement scenarios and see how starting balances affect long-term outcomes.

Estate Planning Considerations

Retirement income planning should also consider what happens to remaining super upon death. Superannuation death benefits can pass to dependants tax-free but may be taxed when paid to non-dependant beneficiaries such as adult children. The treatment depends on both the relationship of the beneficiary and the tax components of your super balance.

If leaving a legacy to non-dependant beneficiaries is important to you, withdrawing super during retirement and investing outside super may result in lower tax on your estate. Alternatively, structuring withdrawals to prioritise taxable components while alive can reduce the taxable component remaining at death. These strategies involve trade-offs and should be discussed with a financial advisor and estate planning lawyer.

Conclusion

Developing an effective retirement income strategy requires balancing multiple objectives: generating adequate income, managing investment risk, planning for uncertain longevity, and potentially leaving something for beneficiaries. There is no single optimal strategy that suits everyone, and the best approach depends on your total wealth, other income sources, risk tolerance, and personal priorities.

Starting retirement income planning well before your intended retirement date allows time to consider options, optimise super contributions in final working years, and structure your affairs for tax-effective income. Engaging a qualified financial advisor can help navigate the complexity and develop a personalised strategy that maximises your retirement income while managing the risks inherent in funding potentially decades of retirement.