It’s time to raid superannuation nest eggs

Superannuation minister, Jane Hume, has urged superannuation fund members to draw down their principal to fund their retirements, rather than relying solely on the cashflow from their investment returns (i.e. interest and dividends):

She said the Retirement Income Review found that while Australians are stopping work with more savings than ever, they are living extraordinarily frugal lives. Many remain hesitant to draw down on their super capital, instead living only off the returns from their investments and passing away with most of their retirement savings intact.

“The challenge for policymakers is to help retirees to use their savings more efficiently and enjoy a much better standard of living,” Senator Hume said.

Treasury’s 600-page Retirement Income Review Final Report raised similar concerns to Senator Hume:

Inheritances are significant, representing the transfer of wealth from one generation to another. They are not distributed equally and increase inequity within the generation that receives the bequests. Most people die with the majority of wealth they had when they retired. If this does not change, as the superannuation system matures, superannuation balances will be larger when people die, as will inheritances. Superannuation is intended to fund living standards of retirees, not to accumulate wealth to pass to future generations…

For example, assuming no change in how retirees draw down their superannuation balances, superannuation death benefits are projected to increase from around $17 billion in 2019 to just under $130 billion in 2059 (Chart 3H-5)…

Although inheritances can help people to prepare for retirement, they are distributed unequally, with wealthier people tending to receive larger inheritances than those with lower wealth (Chart 3H6). Inheritances therefore increase intragenerational inequity…

Super nest eggs aren’t meant to be preserved so they can be passed on to one’s children after death. They are meant to be drawn down to fund one’s retirement.

Consider a 67-year old with a super nest egg of $500,000 earning a return of 5% annually (via a combination of dividends and interest).

Relying solely on investment returns to fund one’s retirement would deliver $25,000 a year in income (i.e. 5% times $500,000). But if principal is also drawn down, then $38,200 is available over 20 years to fund one’s retirement.

In short, it’s time for retirees to raid their super nest eggs.