Ask Paul: How much super can I withdraw without using capital?

How much can you safely withdraw from super without eating into your nest egg? Paul Clitheroe shares his retirement rule of thumb.

Reader question

Hi Paul,

I am 62 years old and have started drawing down on my super.

I would like my super to last well into my 90s and for the next 10 years I would like it to keep accruing, meaning I don't want to draw down on my capital.

My super is with UniSuper Balanced (Flexi Pension), which has earned 9.04% over the past 10 years.

My question is: what is a 'safe' withdrawal rate to make sure it keeps accruing, 4%, 5%? - Fiona

Paul's response

Excellent question, Fiona. What would be helpful would be a use-by date on the back of our neck, because one of the biggest challenges with money is life expectancy.

Sure, we can consider our genetics, the age of brothers, sisters, parents and grandparents, but the reality is life is unfair.

At age 71, I have deceased friends from my uni days whose parents are still alive and while it is only a case study of an individual person, a mate of mine has had no family members making it past 50.

So he saw no point in saving until he passed age 50 and has been frantically saving ever since. He now approaches 70 and is still golfing off a low single-digit handicap. Go figure.

My wife, Vicki, and I, now both in our 70s, live the way we want to live and we're not fussed if our capital goes backwards between now and 85, but that is not the case at your age of 62.

We also thought it sensible to preserve capital until about 70.

We do know a couple of things.

First, people who understand money tend to be conservative. We've all worked hard to grow a capital base.

But, ironically, money-conservative people tend to die far too rich.

Second, as long as there is money for aged care and health, which for many of us is most likely funded by selling our house, additional capital is not generally a lot of use in the later stages of life.

To preserve capital our best guide is history and we have thousands of years of this when it comes to property, and good records of sharemarket returns since the late 1700s.

History is no absolute guarantee, but it does not seem unrealistic to expect 8% to 9%pa returns on average from a balanced portfolio.

Investments such as shares average dividends of about 3% to 4%, these are usually franked, providing an extra benefit to a low taxed investment like super.

Let's say this is worth 1%pa. So we need 3% to 4% growth to get us to 8% to 9%. In a roughly 3% to 4% inflation period, this type of return over the longer term seems reasonable.

Some will argue that a 4% drawdown is a safer number, others like me would be a little more aggressive and say 5%, mainly because I know I am alive today, but may be gone tomorrow.

It is a historically sensible argument that taking out 4% to 5%pa, is, over the long term, likely to preserve capital in terms of real spending power. In the longer term, you may wish to spend more, unless your goal is to preserve capital for those your estate goes to.

We want to leave something for our kids and grandkids, but we've worked long and hard and our bucket list is calling.

What to read next

• The most dangerous number in retirement planning
• Australians saved hard - why do they still fear retirement?
• Why so many Aussies are dying without touching their super
• The simple change that could leave you 35% richer in retirement
• Why thousands of retirees are better off with less super

Get stories like this in our newsletters.