Retirement pension minimum withdrawal rate doubles for retirees

Financial Planners

Superannuation Minimum Withdrawal Rate Baby Boomer Retirement Australia

Has anyone made any sane judgment that now is the right time to double the salaries of many baby boomers?

Now, at last, and perhaps very belatedly, it was none other than the federal government that called for an end to the pandemic measures to halve forced withdrawals from superannuation.

That’s right, starting July 1st of this year, the minimum withdrawal rate has doubled for those retiring and living on pensions drawn from Superfunds.

The return will bring significant wage increases for many

This means that after a few years the minimum dropout rate will return to between 4% and 14% depending on age, dropping to just half that number.

These amounts are minimums, and nothing can stop baby boomers and even older retirees from withdrawing more, but the vast majority of people living on superannuation receive minimums. It seems that.

For example, Aware Super said about half of its customers in drawdown mode were consuming the legal minimum before the COVID-19 change.

This has changed to about 40% during the pandemic, but even after the “emergency” halving of minimum withdrawal amounts, many people still need to increase their monthly or biweekly payments.

Withdrawals already increasing

That’s a lot of cruise work to do, especially for seniors over the age of 75, who are far more likely to fall under the ‘minimum’ withdrawal rate.

Interestingly, withdrawals were already up even before this change, with $14 billion in one-time withdrawals last quarter.

It’s hard to say for certain, but it’s possible that these withdrawals to increase regular payments were to cover rising costs of living, or to pay off debt that has become much more expensive now that interest rates have risen sharply. unknown.

All of this raises the question of whether these mandated withdrawal minimums are set at the right level in the first place.

longevity and a living wage

The whole idea of ​​the limit is that it is designed to support people in retirement rather than acting as a tax dodge for their beneficiaries, so longevity and ultimately super before death. Based on a combination of draining as much as possible from the account.

Surprisingly, therefore, the end of the temporary reduction applied from March 2020 to the end of June this year will return to the old minimum drawdown starting at 4% of those receiving a private pension until the age of 20. 74, then increased by 5% (65 to 74), 6% (75 to 79), 7% (80 to 84), 9% (85 to 89), 11% (90 to 94) Lottery, 14% for those 95 and over.

Many accounts continue to grow even after retirement

As you can see, assuming an average long-term super return of 6.5% for balanced funds and 8.1% for growth funds, balances should continue to grow until about age 80. This is why so many Super Accounts end up being inherited rather than inherited. Used to support income after retirement.

The minimum amount is also not very realistic, with the 60s and 70s likely to be more active and spending increasing, while at the same time the minimum withdrawal amount most people are comfortable with is between 4% and 6%. % is quite low. %.

Then, when activity levels and travel tend to decline, supercash starts piling up in your bank account, and the only expenses trending upward are medical bills and lodging in nursing homes.

Minimum may not be optimal

For this reason, many financial planners choose to vary their payments above the minimum payment in the early stages, of course on a case-by-case basis.

In early retirement years, considering “riskier” growth and returns from high growth, a minimum of 4%, depending on financial market conditions and risk tolerance, should continue to grow slowly or steadily 5% is often seen as a good middle ground between gender. Funds tend to go up.

In some cases, again depending on the circumstances, it may be reasonable to withdraw 7% or 8%.

Of course, if you adopt a percentage that is too ridiculously high, you run the risk of living longer than you save, but in some circumstances bulk withdrawals may be reasonable to pay off debt.

Either way, it’s entirely possible that baby boomers will once again land at airports and cruise terminals in record numbers, especially now that interest rates are rising and the risk-free returns of super-term deposits are rising.

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