Eureka Correspondence

Drawing down on retirement savings and measuring super returns.

Drawing down on retirement savings

I reckon this article is unduly pessimistic: The retirement savings safety measure, July 22. I started an SMSF in 1997. Shares 85% balance cash. I retired April 2005, just before my 62nd birthday, with a balance of $1096000, split between my wife and myself. I have made some horrible mistakes over the years by hanging on too long eg Babcock&Brown $80000 down the toilet, and quite a few others of losses between 30000-50000. Since retirement we have drawn $1012535 to date, with a current balance of $1055000. Scott seems to make the assumption that after retirement you no longer make profits, income, and franking credits from the market.

David

Scott Francis’ response: Thanks for the e-mail and interesting data from your own situation.  I do think that there might be an element of conservatism in the 4.5% per year, increasing with inflation, withdrawal rate.  However I am reasonably comfortable with it.  The studies behind this 4.5% calculation looked at investment returns over the past 110 years, and what would have happened to retirement portfolios including situations like the great depression and 1970s downturn.

I did a quick ‘back of the envelope’ calculation, and worked out that a couple who retired 10 years ago with a balance of $1096000 but only withdrew 4.5% per annum increasing with inflation would have withdrawn about $620,000 from the fund – so your drawings of just over $1,000,000 are somewhat higher than that.

One thing to keep in mind is the impact of inflation.  Since you have retired, the price of goods and services have increased by about 30% (around 2.7% per year).  This means that the current balance of the superannuation fund of $1055000 is equal to what $775,000 would have purchased when you retired.   In after inflation returns the value of your superannuation fund has fallen by around 25%.  I think that over a 30 or 40 year retirement this is a really important judgement for Eureka readers to consider – how quickly do you draw on your investments so that you are comfortable with the way the purchasing power of your investments/portfolio changes?  One of the questions might be – in 20 years, if your drawings continue to roughly equal your earnings from the superannuation fund and the balance stays at around $1,000,000 – will the purchasing power from $1,000,000 be enough to provide the security/lifestyle you are comfortable with, given another 20 years of price increases on goods and services?

Measuring super returns

I was disappointed with Bruce Brammall's article on SMSF returns (Were your returns super or normal?, July 15).  There was no mention of different expectations for 45 year old working person's fund and that of a 71 year old who whose fund is in the pension phase. Such feedback would be helpful.

Bruce Brammall's response: Thanks for your letter. Age doesn’t determine your returns. The risk that you take in your portfolio does. The return for a “balanced” investor in a particular fund who is 35 is going to be the same return as for someone who is 65 and also in the same balanced fund. For SMSFs, who are choosing their own assets, the risk is determined by the assets that you choose, not your age. However, generally, younger people are willing to take more risks, so they might be “growth” or “high growth”, while older investors see their willingness to take a risk reduce, so they become more conservative. Returns have nothing to do with age, but the risk that you take, and this is what the article was trying to point out.