Taking more than you need from your nest egg?

A common way to measure the sustainability of retirement income is to calculate an annual withdrawal rate – the amount of income as a proportion of a retiree’s total capital.

For instance, drawing an income of $4,000 a year from savings of $100,000 is, of course, a four per cent withdrawal rate.

And a leading topic of discussion in the retirement services industry is identifying an optimal drawdown rate so that a retiree’s capital lasts as long as possible.

Recently-published research from Vanguard in the US goes a step further by looking how much of annual retirement drawdowns by retirees are actually spent. The findings may surprise you.

The researchers found that a high percentage of retirees receive larger withdrawals from their various retirement, investment and savings accounts (including the equivalent of our super) than needed to finance their spending over the year examined.

In turn, their findings may influence how we think further about how much to drawdown from our retirement savings each year and truly underline the importance of giving sufficient weight to retirees’ actual spending habits.

The research focuses on the withdrawal and spending patterns of retiree households with a minimum of $US100,000 in financial assets. This minimum was set so participating retirees had “meaningful” financial assets to draw upon and did not rely entirely on a government age pension for an income in retirement. More than 2600 retiree households with members aged 60 to 79 took part in the survey, which was conducted in 2012 and then analysed. The retiree households had a median income of about $US69,500 (including government pensions) and median wealth in financial accounts of $US419,000.

One quarter of the retirement incomes of this sample of retirees came from their retirement, investment and savings accounts.

The researchers concentrated on 10 types of financial accounts: including personal retirement savings accounts; employer-sponsored retirement, defined-contribution plans; managed investment funds; bank accounts; and money-market accounts. (These accounts do not include, of course, guaranteed income from social security and guaranteed pensions.)

On average, the income of these households comprises: 26 per cent from financial account drawdowns, 53 per cent guaranteed income, 11 per cent wages and 10 per cent from other sources such as real estate rents and trusts.

The researchers make the point that “some or all” of compulsory minimum withdrawals from certain retirement accounts (as with pensions from Australian superannuation funds) are not always spent but reinvested in another financial account.

Key findings include:

  • Three-quarters of the retiree households in the sample made withdrawals from their financial accounts. Yet only seven out of 10 households spent the money.
  • A “full” 66 per cent of retiree households had spending rates of less than three per cent of their capital in these accounts (including not spending anything).
  • Some 23 per cent of retiree households had a spending rate of five per cent or more of their capital. “This means that close to one-quarter of households are at risk of seriously depleting their financial assets if the observed one-year spending is sustained,” the report comments.

The actual spending of retirees is obviously a critical consideration when attempting to determine how long retirement savings may last.

Peter Rodgers
Peter Rodgers
Peter Rodgers, the founder of Direct Advisers, holds a Bachelor of Arts degree and has been a practicing financial planner since 1986. With a background in law and economics, Peter is particularly skilled in understanding investments and investment portfolio construction. His main role is developing investment strategies for clients.