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How do I get my super when I retire? And how much will I need?
By Bec Wilson
Superannuation is one of the essential ingredients of a great retirement, but for many it’s also the source of many questions.
So let’s walk through a simple lesson on superannuation for modern retirement – how it works, how much you need, and how you can put it to good use.
Knowing how much super you’ll need in retirement is a difficult calculation, but there are ways to start planning early.Credit: Marija Ercegovac
Two phases of superannuation
Superannuation has two main phases: the accumulation phase, where we build up our fund balance, and the retirement phase, where we spend our savings.
During the accumulation phase, employers contribute to super funds on behalf of employees, who can also make additional contributions. Concessional contributions up to $30,000 per year from July 1, 2024, are taxed at 15 per cent, while non-concessional contributions up to $120,000 per year are taxed at the marginal rate.
These contributions grow over time but remain inaccessible until retirement, with few exceptions, allowing the funds to grow powerfully through compound investment. Hailed by Albert Einstein as “the eighth wonder of the modern world”, this underpins superannuation.
Through it, investments experience exponential growth as returns are reinvested year-on-year, and additional funds are added through contributions, too. A 7 per cent compound return doubles the initial investment every 10 years, not accounting for additional contributions, while a 10 per cent return doubles it every seven years.
Moving into the retirement phase
In the retirement phase, you can start drawing from your superannuation fund. This can be done at regular intervals or as lump sums, and you typically kickstart the process by providing your fund with a designated form and proof of identity. You also need to have met one of the conditions of release, typically turning 60.
Moving into the retirement phase involves opening a retirement phase account. You can move up to $1.9 million – which is the current transfer balance cap from the accumulation phase, where you pay 15 per cent tax on earnings (up to $3 million) – into the retirement phase, where you pay no tax. If you have more than this amount, you simply keep it in the accumulation phase.
You then allocate it to a selection of retirement investment products – including the most popular type, an account-based pension – and other products like annuities and lifetime income streams that are expected to become more popular as we live longer.
Many funds also offer a “transition to retirement” account that you can access after the age of 55 if you meet a range of criteria, like moving into part-time work. This allows you to access a limited income stream from superannuation to help you adapt to retirement over time.
Once in the retirement phase, you must meet compulsory drawdown rates set by the government. For those under 65, the rate is 4 per cent of their balance; it increases to 5 per cent for ages 65 to 74, 6 per cent for 75 to 79, and continues rising with age. This ensures superannuation funds are used to support living expenses, rather than being hoarded.
Most superannuation earns 50 to 60 per cent of its lifetime total during retirement, thanks to the power of compounding on larger balances. Even if you draw down 5 to 6 per cent annually, most funds earn more, allowing the balance to grow unless withdrawals exceed earnings.
How much super do I need?
The Association of Superannuation Funds of Australia (ASFA) provides a commonly referenced suggestion that single retirees need about $595,000 and couples $690,000 in superannuation when they retire to live comfortably.
This assumes home ownership, access to a partial age pension and no other income. As of March 2024, ASFA projects that a single person needs $51,630 and a couple $72,663 annually to live a comfortable retirement.
They offer a lower benchmark for a more modest retirement, with people who are eligible for the full age pension said to be able to afford an annual income of $47,387 for couples and $32,915 for single people, with just $100,000 in superannuation at retirement if managed carefully.
What about the pension?
When we retire we usually move from earning one pay cheque to living off several sources of income. These might include income from superannuation, the age pension, investments outside superannuation and income from working. About 62 per cent of Australians over 67 draw some form of age pension.
The age pension and superannuation systems are designed to work together to support retirees. Understanding this interaction can help maximise retirement income, especially for those with median super balances of $150,000-$250,000.
To be eligible for the age pension you must have been an Australian resident for more than 10 years, be over 67, and pass both assets and income tests.
The income test assesses various income types, including investments, working income and rental properties. Pensions taper once income exceeds $204 per fortnight for singles or $360 for couples.
For every dollar above this threshold, the pension reduces by 50¢ for singles and 25¢ per person for couples. The pension income threshold is $2436.60 per fortnight for singles (approximately $63,351.60 annually) and $3725.60 per fortnight for couples (approximately $96,865.60 annually).
The assets test excludes your primary residence and assesses other assets. For a full pension, single home owners must have assets below $301,750, and couples below $451,500. Above these thresholds the pension tapers up to cut-offs of $674,000 for singles and $1,012,500 for couples who own their own homes.
The sweet-spot strategy
A strategic approach many retirees use is finding the “sweet spot” to maximise income from both superannuation and the age pension. This involves having just the right amount in superannuation to avoid exceeding the assets (or income) test limits, thus maximising their age pension eligibility.
Consider Rachel and Josef, both 68, with $451,500 in superannuation and a fully owned home. With a 5 per cent drawdown rate, they receive $22,575 from super and $43,752 from the age pension, totaling $66,327 annually – close to a comfortable retirement income. They can also earn up to $11,800 as a work bonus each annually without affecting their pension.
Alice and Bob, also 68, have $1,200,000 in superannuation, own their home and are ineligible for the age pension. With a 5 per cent drawdown rate, they get $60,000 annually from super.
Most high-income earners are on track for a comfortable self-funded retirement having benefited from the generous tax treatment of superannuation.Credit:
To approach a comfortable income, they might increase their drawdown to 6 per cent, yielding $72,000. They can earn whatever they like from working, though, because they are ineligible for the age pension.
The sweet-spot strategy is one most retirement and superannuation fund financial advisers are well-versed in and can help you navigate your way through. It’s certainly not right for everyone, but for average Australians it can be a clever strategy to research further. And understanding it can give you greater confidence to spend earlier in retirement.
That’s superannuation in a nutshell. It sounds complex, and in the early days of retirement it certainly is difficult to navigate it and juggle its interactions with the age pension. But once you work it all out you might find yourself quite grateful the systems interplay so harmoniously.
This is the fifth part of our six-week Super Fit series, covering everything you need to know to get your superannuation in the healthiest possible shape. Come back next week for our final piece on how to spend your super.
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.