Retirement Planning

The 4% rule is a retirement planning concept that suggests you can make your money last through 30 years of retirement by withdrawing 4% (adjusted for inflation) of your total investments each year. Although the 4% rule can be a useful concept, it has several drawbacks.   

It was invented in 1994 by American financial adviser William Bengen. The most obvious issue is that Bengen didn’t design his rule to account for Australian super laws, which have minimum drawdown percentages for account-based pensions that start at 4% and increase to 14% by age 95. That alone makes the 4% rule difficult to work with, unless you want to invest your surplus super withdrawals into investments. 

The financial landscape has also changed hugely since 1994, with rising costs of living and different market circumstances. That means the 4% rule may not be suitable for older Australians grappling with very different financial scenarios to Bengen’s clients. 

The best way to work out how much you should withdraw and spend each year in retirement is to meet with a financial adviser. They can give you modern, personalised advice that reflects your unique post-work goals, and can adjust that advice if unexpected events like COVID occur.         

Yes, inflation affects how much money you need to retire. Inflation is a normal part of how the economy works; the RBA aims to maintain an inflation rate of 2–3% each year.  

For example, if you had all $100,000 sitting in a bank account at the start of a year where inflation was at 3%, the purchasing power of that money would decrease by 3% by the end of the year, effectively making your $100,000 ‘worth’ $97,000.   

Inflation is one reason why it’s important to invest your money. Interest on your savings and appreciation of assets are two mechanisms that help offset inflation-induced decreases in purchasing power. For example, if you had your $100,000 invested in an ASX 200 index fund that saw returns of 9.3% that year, your $100,000 would increase to $109,300 – which, adjusted for inflation, would be ‘worth’ $106,021. 

As such, your money should be invested in a way that maintains its value against inflation – something that the right retirement strategy can enable. 

According to AFSA, you’ll need $595,000 to retire comfortably as a single person at 65. Couples need just $690,000 between them to achieve a comfortable retirement. (A comfortable retirement is one that allows you to maintain a good standard of living – good healthcare, occasional meals out, leisure activities, a reliable car, and a well-maintained home.) 

If you have $100,000 in super at retirement (as a single person or as a couple), you can maintain a modest post-work lifestyle – basic healthcare, an older vehicle, limited takeout meals, and so on. Your super income will be supplemented by the Age Pension, so you won’t need as much as someone living a comfortable retirement.  

Keep in mind that, if your super isn’t currently on track, you still have plenty of options. Your financial adviser can help you do things like adjust your super strategy and increase your concessional contributions, which can improve your balance over time.  

The maximum basic Age Pension rate you expect to receive as a single person or as a member of couple is available here. You’ll be eligible for that rate if you earn less than a minimum income required as a single person or as a member of a couple.

While it’s certainly possible to live off the full Age Pension, you may find that having only a limited amount to spend per week is difficult, particularly if you don’t own your own home. Holistic retirement planning can help you save enough money to live comfortably both today and when you’re ready to stop working.