Time for planners to review 4% rule

financial-planning/retirement-income/retirement-savings/advice/morningstar/

9 February 2016
| By Mike |
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Current minimum withdrawal rates for account based pensions in Australia may lead to investors depleting retirement assets too soon, according to new research published by Morningstar.

The assessment, contained in a paper, Safe Withdrawal Rates for Australian Retirees, questions whether the so-called "four per cent rule" can any longer be justified in circumstances where the state of the markets have changed and Australians are living longer.

The Morningstar analysis suggests that given how well investment markets have performed in the past, Australians may now have unrealistic future return expectations and that advisers should be taking this into account.

It said that while safe withdrawal rates today are similar to historical averages, they are lower and may be significantly lower when incorporating improvements in mortality and the impact of fees. Further, it said current minimum withdrawal rates for account based pensions in Australia may lead to investors depleting retirement assets too soon.

The Morningstar analysis said Australians had been very fortunate in terms of historical returns when compared to many other nations.

It said that because Australians had been relatively fortunate from a historical returns perspective, this might prove problematic when modelling retirement because investors might have unrealistic expectations about future returns.

"While it's certainly possible Australian capital markets may continue to outpace its international peers, it's important to get a better understanding of the risks and expectations facing Australia investors today before reaching any conclusions," the Morningstar analysis said.

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