The superannuation system is only now coming of age as substantial numbers of people begin to retire with significant balances. What people choose to do with their savings is clearly of considerable interest to industry and government. For example, concerns are often expressed about the potential for retirees to rapidly exhaust their superannuation and thereafter rely on the age pension. However, the limited empirical evidence available to date suggests that most retirees are inclined to draw down their wealth relatively slowly.
On retirement, people with significant superannuation balances (i.e. over $100,000) typically retain most of it in the superannuation system in the form of an account-based pension (which provides an income stream drawn down from their superannuation balance). Surprisingly few choose to invest in annuities, despite their apparent advantages in managing longevity risk (through offering a guaranteed income stream for life). Those with account-based pensions must withdraw a minimum amount each year (which is 5% for those aged 65-74, and increases with age), but beyond that they are free to choose how much to spend.
For this project CSIRO analysed the anonymised account records of over 150,000 individuals with superannuation, working with the Australian Taxation Office (ATO) and a large superannuation fund. The data cover members of funds regulated by the Australian Prudential Regulation Authority (APRA), which includes all retail and industry superannuation funds, as well as people with self-managed superannuation funds (SMSFs).
The data show that most retirees with account-based pensions withdraw close to the minimum allowable amount from their superannuation each year. There is, however, considerable variation, with around a quarter of retirees withdrawing more than twice the minimum. Those with larger balances are most likely to make the minimum allowable withdrawals, and there is some evidence that men withdraw superannuation at a greater rate than women, which may reflect the longevity gender gap.
Overall, across both APRA and SMSF funds, with large and small balances, the majority of withdrawals are close to the minimum. These modest withdrawal rates, coupled with the relatively strong investment returns seen recently, mean that most retirees see their superannuation balance actually increase slightly in most years. These increases are in nominal rather than real (i.e. inflation adjusted) terms, and are unlikely to persist as superannuants get older (minimum withdrawal rates increase with age) or in times of lower investment returns.
Nonetheless, if people continue to withdraw at or around the minimum (note the data mainly cover retirees aged in their 60s and 70s, as so far there are few older people with superannuation), many will die with substantial amounts of their savings unspent. This represents the cost of self-insuring for longevity risk, with the next generation likely to be the beneficiaries through inter-generational bequests.
From a behavioural science perspective, the data suggest that many people may be struggling with the complexity of the drawdown decision and may, by default, be using the minimum withdrawal rates as a guide. The account-based pension system requires retirees to make withdrawal and spending decisions under considerable uncertainty around longevity and future expenses. Given people are generally risk averse, it is perhaps not surprising that the minimum withdrawal rates have come to act as an anchor for uncertain decision-makers.
Framing is also likely to be important. The superannuation system is generally thought of, and discussed, in terms of savings and investment, rather than consumption and spending. An individual’s account-based pension contains what is, for that individual, a large sum of money which they have spent many years saving. While straightforward to describe in a spreadsheet, switching from thinking about saving to thinking about spending may not be easy for a human decision-maker. Drawing down on a non-replenishing resource may also represent a psychological challenge.
Changing the way in which the drawdown phase is framed may therefore help people’s decision-making. As the superannuation system matures it would also benefit from a greater range of retirement income products to help individuals better manage their longevity risk. Those concerned with superannuation, whether as trustees, advisors or policy makers, can use data-driven behavioural insights to better understand and serve superannuants.
Reeson, A., Zhu, Z., Sneddon, T., Stephenson, A., Hobman, L., & Toscas, P. (2016). Superannuation Drawdown Behaviour: An Analysis of Longitudinal Data. CSIRO, Brisbane.