A framework to maximise retirement income

When you retire, your salary stops. From that point on, you need to fund your lifestyle using your own savings plus any Age Pension income you might become entitled to. 

For very wealthy people, this might be easy, even without an Age Pension. For those with very little, it can also be straightforward – if they’re able to live on the Age Pension as this provides them a lifetime income stream.

But for those in between, who we refer to here as ‘middle Australia’, the maths to get this right is really difficult. A key issue is that no one knows how long each retiree will live. It’s therefore not possible to calculate how much someone can safely draw from super – as you don’t know when their balance needs to reach zero! 

The key points summarised below form the basis of the Dialogue Paper A Framework to ‘Maximise’ Retirement Income, which Jim Hennington co-authored alongside Andrew Boal. 

The following chart illustrates the actual age of death for all Australian retirees who died during 2020.

Source: Australian Bureau of Statistics figures. Note: Median is the 50th percentile.


Australia’s Retirement Income Covenant

In February, legislation was passed requiring all superannuation funds (other than self-managed super funds) to become more proactive in how they help retired members turn their balances into regular income. 

Getting it right has the potential to increase retirees’ incomes by up to 30% – with no increase to contributions[1].

A Framework to ‘Maximise’ Retirement Income is intended to help superannuation trustees think through the quantitative elements of this legislation. The paper focuses on the ‘middle Australia’ cohort. For example, those whose incomes fall between 30% and 80% of the population.

This cohort is likely to have sufficient savings to desire a lifestyle that’s higher than the income from the Age Pension in retirement, and which won’t run out.

Under the Covenant, trustees must help their members balance three key objectives:

  1. Maximise their expected retirement income over the period of retirement;

  2. Manage expected risks to the sustainability and stability of retirement income over the period of retirement; and

  3. Have flexible access to expected funds over the period of retirement.

To maximise and manage something, it helps to be able to measure it. But with ‘retirement income’, measuring it is more difficult than first meets the eye.

Measuring ‘retirement income’

In 2022, the retirement product most super funds offer is called an account-based pension (ABP). The amount that gets paid into each retirees’ bank account each year is actually the member’s choice (subject to a regulated minimum), but it can run out. 

In the extreme, a person can take their entire balance out over a short period and count this as ‘retirement income’. But drawing down the balance too fast means running out whilst you’re still alive. While drawing it down too slowly means the retiree would die with unspent wealth that could have been used to deliver higher income and a better lifestyle.

When we examine the needs of middle Australia retirees, it’s clear they’re likely to expect their annual income from superannuation to last for life. This would mean their ‘period of retirement’ (for the purposes of the Covenant’s legislation) ends upon the death of each individual, rather than ending at a pre-set age (e.g. based on ‘average’ life expectancy).

So how do we quantify retirement income at the point of retirement – if it’s based on drawing down a balance over an uncertain timescale?

An approach used in other countries is to base it on the annual amount of income that could be purchased from an insurer – using a lifetime annuity formula. With a lifetime income product the income gets paid for the member’s whole life – irrespective of how long they live. 

Australia changed the laws in 2017 to allow superannuation funds to offer a much wider range of lifetime income stream products to members in retirement. In 2019, valuable means test incentives were also put in place for these products. Importantly, lifetime products aren’t limited to traditional annuities (that guarantee a fixed rate based on today’s interest rates). Super funds can unbundle longevity risk from investment guarantees. For example, an investment-linked lifetime income stream passes on the investment performance to the member. Their level of income will vary but it can never run out. 

Balancing risk and reward

In the field of investments, cash is often regarded as a ‘risk-free’ asset. But investors are often willing to take on some risk in the hope that they can do better than cash returns. Cash is used as a reference point for this decision.

With retirement income, the product that removes the three main risks (uncertain lifespan, uncertain inflation and uncertain investment returns) is a traditional inflation-linked annuity. For means-tested pensioners, it also delivers a steadier pattern of Age Pension income than for an ABP[2].  Again, many retirees may be willing to take on some risk in the hope that they can do better than this ‘risk-free’ income.

A problem with account-based pensions under the means test rules is they can result in an Age Pension that is low in the early years of retirement and higher later as the person’s assessable assets reduce over time. This does not necessarily apply to a lifetime income product in the same way.

Superannuation trustees can design different combinations of product to suit various groups of their members based on their circumstances. When they decide how much risk their members might be exposed to in retirement, trustees need to carefully consider the rewards and consequences of those risks and how much downside could cause a materially detrimental effect on the members’ standard of living.

In 2018, the Australian Government Actuary (AGA) proposed an Income Risk metric that could apply to all retirement products, including ABPs. The approach simulates the projected year-by-year payments from a particular retirement strategy against a benchmark level of income up to an age where the vast majority of the population would have passed away. The results get summed across many simulated scenarios to give a single metric that captures market, inflation and lifespan risk at once. 

Maximising retirement income (in light of risk tolerance)

Ultimately, a risk-return framework is needed. A possible framework for trustees to make the determinations required under the Retirement Income Covenant is as follows:


Period of retirement end date

The death of each individual retiree.

Safe retirement income (Benchmark)

Annual income that can be expected using a ‘risk free’ lifetime income stream (or partial use of a lifetime income stream).

This could be informed by market rates and would provide a reference point when designing retirement income strategies for retirees.

Expected retirement income (from a given strategy)

Commencing level of annual income from a particular retirement strategy. A ‘strategy’ may combine a number of product types, investment strategies and drawdown strategies.

Retirement income risk (for a given strategy)

The AGA’s proposed Retirement Income Risk Measure.

Trustees can approach the modelling for this on two distinct levels.

  1. Outcomes for a cohort ‘in expectation’: Each member’s future retirement income can be projected, then multiplied by the proportion of members who are still alive in that future year to receive it. The result can be summed across all members in the cohort. Such an approach gives a measure of how efficient a strategy is ‘on average’ but ignores the fact that a predictable number of the individual members could get very poor outcomes (if they die early or live a long time).

  2. Outcomes through the perspective of the individual: For example, if every individual member wants to be 80% confident that their superannuation income will last as long as they live, then a model should look at what income is achieved up until the age that gives them an 80% chance of covering their potential lifespan. Initially, approaches (1) and (2) may seem to conflict with each other, that is, to make super last longer (2) means the strategy is less efficient in expectation (1). But innovative lifetime income products have the potential to achieve both these aims simultaneously. They can deliver higher annual income than a cautious drawdown rate from an ABP and do this without any increase in the risk of outliving their savings.

In effect, lifetime products redistribute money that would otherwise be paid as death benefits later in life. Individuals who pass away leave behind reserves that get used to maximise the retirement incomes of all retired members in the product.


At the end of the day, the objective of the Retirement Income Covenant is to improve the outcomes for individual members. Lifetime income streams can be combined with account-based products to design solutions that meet a balance of carefully calibrated objectives and risk characteristics. They can deliver 15% – 30% higher annual incomes (that last for life) by repurposing bequests from super.


[1] – Actuaries Institute Submission to the Retirement Incomes Review – https://www.actuaries.asn.au/Library/Submissions/2020/retirementreview.pdf (Page 20)

[2] – A problem with account-based pensions under the means test rules is they can result in an Age Pension that is low in the early years of retirement and higher later as the person’s assessable assets reduce over time. This does not necessarily apply to a lifetime income product in the same way.

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