Actuaries develop drawdown rule of thumb

The Acuarties Institute has devised a ‘rule of thumb’ to help retirees work out what money they should drawdown in retirement.

The three rules were:

  • Drawdown a baseline percentage rate that is the first digit of their age;
  • Add 2% if their account balance is between $250,000 and $500,000; and
  • The above point was subject to meeting the statutory minimum drawdown rule.

For example, a single retiree with a balance of $350,000 aged 60-69 would drawdown 8% of their savings, which equalled $28,000.

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The initial calculations were performed for pensioners of different ages and different levels of assets, in bands of $20,000.

Those calculations lead to detailed tables of optimal drawdown rates and allowed for the age pension which would be payable to a pensioner with reference to their assets.

The optimal drawdown was built on a single homeowner pensioner, designed to promote the best possible lifestyle, but allowing for risk if they had spent too much in the early years.

The concept was devised by John De Ravin, Estelle Liu, Rein van Rooyen, Paul Scully and Shang Wu.

“The majority of Australians are members of defined contribution superannuation schemes, and on retirement they apply the balance of their account to start an account-based pension,” De Ravin said.

“But it is very hard for retirees, who are generally risk averse, to work out how much of their savings they should live off at any point in time.”

De Ravin said the Federal Government had encouraged the industry to develop better products to help retirees avoid outlive their spending, but it was still way off.

“In the meantime, we’ve taken a complicated set of equations and scenarios, and worked out what is a simple guideline that works,” De Ravin said.

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