How to stop your super fund running out of money when you retire

How should someone who is retired and drawing a pension from their self-managed superannuation fund manage their cash flow and capital preservation requirements?

There has been much discussion recently on how to increase a retiree’s “appetite” to draw down their super capital in retirement. The government has emphasised that super is not an estate planning asset that is accumulated in retirement and then passed on to the next generation. But with life expectancy increasing and escalating costs in older age a concern when it comes to aged care, the desire to preserve capital is understandable – particularly for those focused on remaining self-funded for the rest of their lives.

First, the annual account-based minimum pension requirements do some of the heavy lifting for the government as you get older in terms of forcing you to increase the cash flow drawings from your SMSF. Under the annual limits, you are required to draw down 6 per cent of your pension balance each year at 75; 7 per cent at 80; and 9 per cent at 85. This obviously will affect your ability to preserve your capital. The key component that then takes on far more importance as these annual pension limits increase is your SMSF’s investment strategy.

Let’s assume that at 65 you retire and start drawing a pension from your SMSF. You are firstly required to draw down 5 per cent of your pension balance each year between 65 and 74. Your investment strategy includes some Australian and international shares together with some cash. Your investment strategy is classified as a “growth” investment strategy with about 75 per cent of your SMSF balance in growth assets and the other 25 per cent in defensive assets.

Looking at historical data for this type of investment strategy, you should expect to receive a return of about 6.5 per cent to 7 per cent per annum, with a negative return projected to occur once every five years (the worst annual return over the past 30 years for this type of investment strategy is -22 per cent). This would suggest that your investment strategy is fit for purpose and will likely result in your capital increasing over time assuming that the minimum pension drawdown of 5 per cent per annum meets your personal cash flow living expense requirements, and your initial pension capital is of a certain size.

However, what happens as you get into your 80s and your annual pension drawdown requirements increase?