Common Questions on Super

. Reader question: Can you please explain to me how the million dollars of super ever runs out? My thoughts are, if you have a million dollars in super and it returns 7% then you acquire $70,000 a year. This is just spending what your fund earns, not the one million dollars as a principal sum, so why does it ever run out?

ASIC’s response: The MoneySmart Retirement Planner works in “today’s dollars”. So if we assume an inflation rate of 3%, the calculator also increases your drawdowns by 3% each year in order to maintain a similar lifestyle. This means that a $70,000 withdrawal per year would partially dip into your capital after year 1. Or, expressed another way, a notional return of 7% is equal to a real return (after inflation) of 4%. If you only withdrew 4%, it would last forever.

Note: You can see the difference between today’s dollars and tomorrow’s dollars in the SuperGuide table appearing later in the article.

2. Reader question: I just don’t get it. If I have $1.6 mil @ 7%, I generate $112,000 pa so how can my super run out at 87 or 100 if I only withdraw $100,000 pa? Will my super not keep growing? Or is it to do with the aged-based minimum withdrawal increases?

ASIC’s response: If we assume an inflation rate of 3% we also assume that you will increase your drawdowns by 3% each year in order to maintain a similar lifestyle. In effect, your real returns are only 4% each year. This means that you would start to dip into your capital after year 1. You earn 4% in real terms [Trish’s comment: but the amount being withdrawn is more than 4% in real terms each year, which explains why your capital base falls].

For example, if you start at age 65 with $1.6 million, you can draw $83,895 income per year (indexed each year by 3%, and assuming an investment return of 7%) and your funds are estimated to last until age 100.

3. Reader question: I wanted to ask about your statement in this paper [in the introduction of $1 million retirement article] to the effect that a “lump sum of $400,000* can deliver a couple nearly $60,000* (indexed) a year in retirement (which includes the couple’s Age Pension entitlements) until the age of 87?. Using an Age Pension calculator, I get a figure of approx $23,000* per annum from the Age Pension (for a couple). That leaves about $37,000* per annum to make up. Trouble is, according to my calculations anyway, with a super balance of only $400,000, I can’t see a way to generate $37,000 for 22 years, even if invested at 7%, especially if we insist on indexing it at 3%. Have I missed something?”

ASIC’s response: The full Age Pension for a couple is roughly $34,382* a year, while for a single person it is just under $23,000* a year. On an account balance of $400,000*, the MoneySmart Retirement Planner estimates the income (Age Pension + super) to be just under $60,000*, which includes a substantial PART Age Pension, or FULL Age Pension for many of those retirement years.

Trish’s note*: These figures are adjusted by Trish Power to allow for Age Pension increases incorporated into MoneySmart Retirement Planner since the article was first published. The lump sum of $400,000, along with a substantial part Age Pension, delivers just under $60,000 a year for a couple, assuming savings are invested in assets that return 7%, and annual income is indexed at 3%, and including Age Pension entitlements. SuperGuide’s calculations also assume no lump sum expenditure in the first year from the account balance, and that super savings run out at the end of the person’s 87th year.

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