How do you actually spend your super? Here’s all you need to know

The whole idea behind saving for our retirement is that one day we’ll kick our feet back, put our hard-earned savings into a retirement account and start spending it.

But for most people who’ve been earning a pay cheque all their lives, the concept is quite foreign, and the process of converting those savings into a sustainable income can seem daunting.

Spending your superannuation can be daunting and, at times, confusing. Here’s all you need to know about accessing your nest egg.Credit: Marija Ercegovac

Understanding how to transition into the retirement phase, and how it works to support you with an income and lump sums over your years ahead can make all the difference.

Here’s what you need to know about spending your superannuation:

Opening a retirement phase account

When you finally retire, and are ready to start dipping into your retirement savings, you’ll need to shift your superannuation savings from an accumulation phase account to a retirement phase account.

This is an essential step, as it allows you to begin drawing down your superannuation. Most people opt to stay with their existing superannuation fund, but you also have the option to move to a different fund that better serves your needs in retirement.

It is becoming increasingly trendy for funds to offer you a retirement bonus for staying or switching, a lump sum payment based on a set of criteria, which can be as large as 0.5 per cent of the balance you move into the retirement phase. A retirement phase account is essentially a new “tax structure”. You then have to select the type of account or vehicle you want to hold your funds in.

The most common vehicle for accessing your superannuation in retirement is an account-based pension. This essentially turns your super into a regular income stream, similar to receiving a salary.

You can transfer up to $1.9 million per person into the retirement phase, into an account-based pension or allocate them into other retirement phase investments like lifetime pensions and term deposits.

This is called the Transfer Balance Cap, and it’s the maximum amount you can move into the retirement phase during your lifetime. Importantly, any earnings generated from investments within your retirement phase account are tax-free.

Even though you are limited to transferring $1.9 million initially, your account can grow beyond this through investment returns. This growth of your investments remains tax-free, which really does help you maximise your retirement savings.

It’s worth pointing out that some people elect at this time not to move their money into a retirement phase account at all, instead choosing to draw down lump sums intermittently from their accumulation account.

These people don’t get to enjoy the tax-free benefits associated with superannuation in the retirement phase, and their investment earnings and withdrawals may still be subject to tax.

Understanding the retirement phase

The government has designed the retirement phase with specific rules to encourage sustainable, long-term use of superannuation savings. Here are the key principles:

1. Tax-free income and growth: Within your retirement phase account, any income and capital growth are tax-free, up to a balance of $3 million per person. This encourages you to keep your funds invested and benefiting from compound growth long after you’re retired.
2. Compulsory drawdown levels: To encourage you to use your superannuation as a regular income stream, there are minimum drawdown requirements once you’ve transferred your money over to the retirement phase. These rates increase as you age, ensuring that your superannuation is steadily used to support your living expenses.
3. Interaction with the age pension: As you deplete your superannuation savings, which are measured as an asset for their ability to generate you an income, you may become more eligible for a part, or full age pension. The system is designed to provide a safety net, ensuring that you can use the age pension and superannuation in tandem to afford a modest retirement, even if you only have a low balance in superannuation.

Drawing down: how much do you need?

One of the biggest questions in retirement is how much you should draw down from your superannuation. The answer varies depending on your budget, as well as your lifestyle, health, and financial goals, but there are a few important factors to consider.

The government sets minimum annual drawdown rates for the retirement phase of superannuation based on your age. These rates are designed to ensure that you use your superannuation to fund your retirement, rather than hoarding it and giving it to your children when you die. The 2024 rates are:

• Under 65: 4 per cent
• 65-74: 5 per cent
• 75-79: 6 per cent
• 80-84: 7 per cent
• 85-89: 9 per cent
• 90-94: 11 per cent
• 95 and over: 14 per cent

These percentages are applied to your account balance at the start of each financial year. For instance, if you are 67 and have $500,000 in your retirement phase account, you are required to withdraw at least $25,000 (5 per cent) that year.

Balancing drawdowns with sustainability of your superannuation

While the minimum drawdown rates provide a baseline, you need to consider your personal situation to determine what the most suitable drawdown amount is for you. Think through these things in order:

How long might you live in retirement? Allow for the fact that many people will live longer today than basic life expectancies, and if they’re part of a couple, one person within the couple may live a much longer life than expected.

How much do you want to spend on your everyday cost of living and chosen leisure and travel activities in your active retirement years? Keep in mind that money and good times are much easier to enjoy when you are fit and healthy in the first half to two-thirds of your retirement.

How much do you want to budget to spend in your more passive retirement years, as your health declines, and it becomes more difficult to travel? During these years, you may also want to budget for an increasing budget to spend on your health, although in Australia, that is not as significant as in other countries.

You’ll also want to consider how much to invest or put aside to fund your needs for home care or aged care, if you should need it as you age.

Finally, you’ll want to think about your investment risk profile and how much risk you are prepared to take and how that might change in the years of retirement, therefore how much income your remaining superannuation balance will be returning per year and how much growth you want to project to be achieving as you are drawing down.

It’s smart to get some advice at this point, to help you bring the big picture together. You can also familiarise yourself with how your superannuation might work, by playing with the MoneySmart Retirement Income calculator here or the calculators provided by your super fund.

Drawing a lump sum or taking a regular income stream

Many people consider as they enter retirement whether they should take a lump sum or draw their money as an income stream. For these people, I have some food for thought.

It can be really tempting to draw down a lump sum, especially if you have some personal debt to clear, a mortgage to pay, or you want to buy something you’ve always dreamed of. And it might not be a bad option. But there are risks you should understand. Drawing down a lump sum can:

Reduce your ongoing income: When you draw down that money from a lump sum, it won’t be in your retirement phase account generating income for you each year. So, that lump sum today could mean less ongoing income every year of your life afterwards.

Limit your future investment growth: When you draw down those funds, they’re no longer going to be growing through compound investing. Given they’d have been held inside a tax-free environment, that can make quite a difference over your lifetime.

Set you at risk of blowing the lot: The biggest risk I see is that when you withdraw money from your carefully managed superannuation accounts, you really do risk mismanaging them, and blowing the lot, and regretting it later. And many people who do this end up under significant financial stress later in life.

On the other hand, setting your superannuation fund up to provide you with a regular income stream can yield you ongoing benefits:

They’re tax efficient: Your regular income payments from within the retirement phase account of your superannuation are completely tax-free. That is, there’s no capital gains tax and no income tax charged on balances under $3 million.

It offers sustainable cash flow over a long period: An account-based pension is designed to offer you a steady income stream budgeted to lower your risk of running out of money.

Your funds stay invested, generating income and growth: Your money can stay invested in your choice of high, medium and low-risk investments, generating income and growth throughout your retirement. In fact, statistically, it is recognised that 50-60 per cent of the total amount earned by someone’s superannuation is earned in their retirement years, as opposed to the years before.

Supplementing superannuation with the age pension

As your superannuation balance decreases, you may become eligible for the age pension, and the lower your super balance gets, the higher your age pension income can become.

This is usually because your assets or income that trigger eligibility for the age pension decrease. The age pension is a really valuable layer of retirement income which is received by more than 60 per cent of Australians over the age of 67 so you should definitely familiarise yourself with it, and not just because of the income it offers.

There’s also two powerful little concessions cards offered to older Australians, the Pensioner Concession Card – which offers a large list of powerful benefits spanning rates, utilities, healthcare and medicines – and the Commonwealth Seniors Health Card, which is only assessed using the age pension income test, and has quite high income thresholds.

It offers many retired Australians discounts on healthcare and medicines. Here’s a free guide to help you better understand these and other benefits.

Many retirees with average superannuation balances find a clever middle ground, drawing a layer of income from the age pension and another layer from their superannuation, often aiming for what is referred to as “the sweet spot” where they maximise their access to the age pension, hold an appropriate amount in super to generate close to what’s deemed a comfortable income.

Financial advisors that are familiar with the age pension can help you optimise this balance, considering your individual circumstances and looking at ways that you can maximise your overall retirement income if that’s your priority.

Navigating the transition into the retirement phase can seem a little complex at first. But, once you’ve opened your retirement accounts, transferred your funds, and set up your investments, I assure you that you will find a new rhythm in managing your income.

Over time, this will become your new normal, and if you understand the rules and systems that underpin the retirement phase and how they work together, you’ll be well-equipped to enjoy the fruits of your hard-earned savings and look for ways to make your retirement epic.

Bec Wilson is the author of the bestseller How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and she is the host of the Prime Time podcast.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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This story was created in partnership with Colonial First State. The content is independent of any influence by the commercial partner.