How to ensure you have a financially fulfilling retirement
WORKING age Australians are encouraged to grow superannuation to enjoy a rewarding retirement.
New research shows many retirees may be denying themselves a fulfilling retirement by avoiding dipping into their nest egg more than necessary.
A study by the CSIRO found retirees with more than $100,000 in super typically use their nest egg to invest in an account-based pension.
These are an extremely tax-friendly option, and they work a bit like a managed fund.
You can choose the underlying investments in line with your views about risk, and the pension pays a regular income stream in much the same way as a wage or salary.
An account-based key feature means each year you need to choose the size of annual withdrawals - or drawdowns.
Minimum drawdowns apply in order to qualify for a tax exemption on investment earnings.
For instance, if you're aged 65-74 you need to withdraw at least 5% of your balance each year, rising to 14% if you're aged 95 or older.
Beyond these limits you're free to withdraw as much as you choose.
Interestingly, the CSIRO found most retirees stick close to the minimum allowable drawdown.
Only one in four withdraw more than twice the minimum.
Coupled with relatively strong investment returns, this has meant most retirees using an account-based pension have seen the balance of their nest egg increase in recent years.
There are a few reasons why people opt for the minimum withdrawal.
One boils down to behavioural science. It can be hard choosing how much to take out, so it's easier to choose the set-in-stone minimum.
Retirees may be concerned about outliving their savings, taking a conservative approach - making sense if you don't have much in super, that makes sense.
The study concluded many of these retirees will die with substantial amounts unspent.
I realise after a working life looking on super as a form of saving and investing, can involve a radical mindset change to see your it as a source of funds for spending.
The things is, having worked hard to accumulate super, it's not unreasonable to reap the rewards in retirement rather than living an unnecessarily frugal lifestyle.
Something as simple as working out personal goals for the year ahead, and deciding how much income you'll need to achieve them, can be a starting point to understanding how much you should drawdown from your super each year to enjoy a quality retirement.
I'm all for living within our means, and yes, it pays to be mindful of not exhausting your nest egg early on.
But ultimately, your money is no good if you don't let yourself enjoy it.
Paul Clitheroe is founding director of ipac, chairman of the Australian Government Financial Literacy Board, and chief commentator for Money Magazine.