Maximising retirement income

Thought Leadership

Maximising retirement income

16 Nov, 2023

‘You only get out what you put in’ is often used as a motivation to work hard for a goal. This phrase can also be applied to super. The goal for super is to maximise the amount of money that is available for members to spend in retirement. While some people also have a bequest motive, the purpose of super legislation is clear. Super should be about generating income for retirement rather than funding an intergenerational bequest.

Looking at super across the whole of life process, there are two key inputs to the process:

  1. Contributions
  2. Investment performance

These both need to be considered net of frictions such as fees, taxes and costs.

Historically, the focus has been on the accumulation of a super balance, based on contributions and investment performance. With the increasing focus on retirement, there is a growing awareness that this is not enough. What matters in retirement is the income that retired members can spend, not necessarily the starting balance. This is why the Retirement Income Covenant (RIC) refers to maximising retirement income, subject to managing risks and providing flexibility. It is the key output of super.

Measuring super outcomes 

The performance test introduced as part of the Australian Government’s Your Future, Your Super (YFYS) reforms is an important guide to outcomes in super. However, it is only measuring one of the inputs to the final outcome. Good performance does not help if there is not the return of the capital to spend in retirement.1 The final stage of the process is to convert a capital balance into an income stream over retirement. This should be measurable in real time so adjustments, if any, can be made. 

David Bell and Geoff Warren of the Conexus Institute explain how a real-time test can give a reliable indicator of performance and propose using a checklist and/or a quantitative measure, as required, to measure performance in retirement.2 Importantly, the quantitative measure needs to use stochastic scenario modelling elements to assess the retirement risks that are being managed.

The YFYS performance test only considers investment risk, so using benchmarks enables a calculation of risk-adjusted returns as the appropriate measure, not absolute return. In retirement, longevity risk needs to be considered in addition to investment risk as well as inflation risks. This shouldn’t be done by using a single benchmark as the stochastic measure considers the range of possible investment and longevity outcomes which is more realistic than a single measure. 

Stochastic retirement tools 

The Challenger Retirement Illustrator3 is one example of a stochastic retirement tool. It can be used to consider the different outcomes for retirement income (and estate balances) for retirement income approaches. The role of the retirement tool is to help identify the retirement income strategy that can help maximise the income available for the retired member. This may need to include any Age Pension entitlement which provides additional input value to retirement. The income to spend is also likely to be maximised if the capital is spent down over retirement. With good investment performance promoting growth, this will help ensure that members can get the most out of what they have at the start of retirement.

Case Study: Irene and Iain

Irene and Iain each have $350,000 in super and share $50,000 in cash/ term deposits and $20,000 in non-financial assets. They are both 67 and want to be able to spend as much as they can, ‘confidently’ while always having income to meet the ASFA modest living standard of $45,9464 a year.

With a combined $700,000, Irene and Iain might expect to be able to spend at the ASFA comfortable standard of $70,806 for their lifetime. However, modelling out the range of outcomes highlights they only have a 62% chance to be able to spend $70,806 a year (increasing with inflation). On average, this should be ok but the probability is not high enough to give them confidence to spend. 

Further, the range of outcomes highlights the increased risk to retirement outcomes. From the scenarios, Irene and Iain have only a 68% chance of receiving the ASFA modest standard out to their combined life expectancy if they try to sustain the comfortable lifestyle.

To get an 80% chance of maintaining their lifestyle, Irene and Iain need to reduce their spending to $67,500 a year but there are still circumstances where they will miss out on the modest level of spending. Ultimately, it will only be achieved in 84% of scenarios.

A potential solution for Irene and Iain is to invest 20% into a guaranteed lifetime income stream.5 This will increase the probability of sustaining $67,500 from 80% to 92% while delivering the modest standard for as long as they both live in 100% of the scenarios modelled. The chart shows the income sources in the average scenario.

all values shown in todays dollars

Confidence to spend

With 7 million Australians approaching retirement by 2050, ensuring sufficient retirement income to last through the golden years is crucial. The allocation to a guaranteed lifetime income stream can help provide clients with the confidence to spend. They can aim to maximise their lifestyle spending without fear of their living standard dropping too far. Leveraging measurement tools, like Challenger’s Retirement Income Illustrator, allows advisers to partner with clients to scenario plan and forecast, ensuring clients have the know-how and confidence to live the retirement they deserve.


1 Madoff provides an extreme example where high ‘investment returns’ without the return of capital can be catastrophic.

2 Assessing-retirement-strategies-Final-20221202-Updated.pdf ( (accessed 12 October 2023)

3 This is for adviser use only and can be made available for advisers to assist members in retirement

4 As at June 2023

5 Source: Challenger Retirement Illustrator (17/10/2023) using Social Security rates and thresholds effective 20 September 2023.  67-year-old female/male client couple.  $350,000 each in super income streams. Assumes returns of 4.0% p.a. for defensive assets and 8.0% p.a. for growth assets before fees. $50,000 cash/TDs earning 4% p.a. interest.  Non-financial assets of $20,000.  Target income includes $45,946 p.a. essential income.  Amounts shown are in today’s dollars. CPI of 2.5% p.a. See Challenger Retirement Illustrator for all assumptions.