How does your super become retirement income?

If you’re still working, it’s easy to think of super as nothing more than forced savings for some far-off future. Your concentration is probably on the here and now of managing income, paying bills and supporting family needs.

But super has two stages; the accumulation phase and then the spending or decumulation phase when you step back from full time work.

Many Australians who are still in accumulation phase express concerns about ‘having enough’ and whether their money will ‘last the distance’. These concerns can sometimes lead to financial anxiety. By understanding how your super will become retirement income, you can avoid this stress while ensuring that you maximise your savings.

Here’s a five-point overview of how the decumulation phase can work well for you.

1. Preservation Age

This is the specific time when you will be able to make decisions about how and when you wish to withdraw your savings, i.e. your decumulation phase begins now! With a few exceptions, for people who have stopped work, this will be 60 years of age. But because you may be able to withdraw your funds at age 60, doesn’t mean you have to. There are three broad ways people generally approach this opportunity to access super, assuming they meet the ATO conditions of release

• Those who are unable to continue working or feel they are ready and financially able to stop at age 60 can decide to retire (i.e. work less than 10 hours a week) and can therefore fully access their savings in super tax free.
• Some people will wish to make the change via a ‘Transition to Retirement’ (TTR) using the specific TTR strategy to access some super, while still working and retaining the ability to continue to contribute to their super savings. You can learn a lot from this TTR explainer. You can also talk to your fund about how this could work in your own particular circumstances.
• Still others may note the ability to access super but be happy to leave it in their accumulation account and keep working allowing them to access their super tax free at 65, regardless of their working status.

2. Different ways people withdraw money

Taking money out of super when you reach the spending phase can be done in a few different ways. You can take a lump sum to cover big ticket expenses such as a dream holiday, home renovations, a new vehicle or perhaps to meet family needs. But this needs to be carefully considered as withdrawing large amounts of money means that there is now less to fund your ongoing living expenses.

For this reason, many retirees will set up an Account-Based Pension (ABP) which is a tax-free account from which you will receive a regular income stream or regular retirement ‘pay cheque’. As well as tax advantages, your money continues to earn returns and for the majority of Australians (65 percent), be supplemented by a part or full Age Pension payment.

There are other types of retirement income streams you can purchase using your super savings, including Lifetime Income Streams. Some super funds have their own Lifetime Income Stream so it makes sense to see if yours does to.

3. Pros and cons when withdrawing super

There are no rights and wrongs when it comes to using your super. It’s your money, from your work efforts so it’s up to you how you decide to use it. But there are smart ways to maximise your savings.

It’s obviously useful to know the relevant rules up front so you don’t lose money unnecessarily. One such loss might occur when people become nervous during times of economic volatility (e.g. market movements in response to tariff changes) and decide to withdraw money from super and put it into their bank accounts. While cash may feel more ‘tangible’, super is just as accessible. Over the longer term, cash has tended to earn less than half the return of balances in Australian super funds.

Most financial professionals recommend holding a small buffer (emergency funds) in cash, but reducing your ability to earn higher returns on the bulk of your savings may not be your best option. Deciding the mix of your super in retirement across cash, an Account-Based Pension and other investments is often best achieved by seeking advice from someone who knows all the rules. Your super fund is a great starting point for such advice.

4. ‘Futureproofing’ by understanding the rules

Many pre-retirees don’t believe that they will ever receive an Age Pension. Yet 80 percent of Australians in their 80s eventually do so. There’s a two-thirds chance you will start retirement at Age Pension age (67) by receiving at least a part entitlement. So these payments need to be factored in when you are doing your sums. This handy calculator will indicate how likely you are to qualify, so you can see how your super will become a ‘top-up’ on the base Age Pension payments, supplements and the valuable Pension Concession Card.

Understanding how your super savings will combine with pension entitlements to create a reasonable retirement income is critical to retirement income planning. Again, seeking advice from your super fund on this specific question will help to set you up for success. Another rule that becomes relevant when calculating your retirement income options is your Transfer Balance Cap. 

5. Rules of super in later life

It’s easy to feel overwhelmed by the many requirements when accessing super. One way to reduce confusion and stress is to concentrate only on those rules that apply to your current age and stage.

• Pre-retiree

If you are a pre-retiree there will be rules on salary sacrifice, extra contributions and your options at Preservation Age.

• Retiree

If you have already retired, it’s important to know how to keep contributing using opportunities such as Bring Forward Rules and Downsizing contributions, if relevant. It also helps to understand the so-called ‘Younger Spouse’ rule for those seeking an Age Pension.

Contacting your fund to ask which rules apply to you at your current age makes a lot of sense. And if you wish to keep working for as long as possible, knowing when and how your work income could affect retirement entitlements is a really important part of your planning.

Next steps

Approaching Preservation Age is a great wakeup call. It’s time to pay more attention to the many ways of paying yourself a retirement wage. Try not to be overawed by the range of opportunities to access your savings, instead focus on the annual income you think you’ll need, then do the sums to check your progress.

Stick with your Industry SuperFund in retirement and your money could go further. Visit compareyourretirement.com today.

[Disclosure statement]

This content is produced by The New Daily in partnership with Industry Super Australia.

This information provided in this article is of a general nature only and does not constitute financial or other advice. It is important to consider personal objectives, financial situations or particular needs when making financial decisions.