Super fund or bank account – what to choose in retirement

8 September 2022

Choosing how to manage your super nest egg in retirement is an important factor in how long your savings will last and the lifestyle you can lead. Explore 2 common options and see which could suit your retirement needs.

When you reach retirement age and gain access to your super, you have several options to manage your money. These include putting it in the bank, or opening an account based pension. An account based pension keeps your money invested with your super fund, but lets you access it as needed.

 

Your retirement savings

Everyone’s financial situation when they finish working is unique. Your super may not be your only source of income. You may also retire with some debt. In fact, more than 45% of people approaching retirement still have a mortgage1.

Whatever your situation, being in control of your finances is one of the main factors to feeling confident in retirement2. Retirement planning, knowing your options and staying focused on your needs can all help you make the right choice for you.

Let’s look at the benefits and drawbacks of 2 options for your super balance in retirement – putting your money in the bank, or opening an account based pension.

 

Option 1: Withdraw your super as a lump sum and deposit it into your bank account

Choosing to withdraw your super as a lump sum and putting it in your bank account could seem like a good option if you want immediate access to all of your money or have any debts to pay off. But, you’ll have to manage a lump sum for your entire retirement, which could be 25 years or longer. This can be overwhelming for many people.


Lump sum of cash in bank account represented by a bag with dollar symbol
Benefits of a bank account in retirement

Benefits of a bank account can include:

  • A bank account is a familiar option.
  • If you transfer your super to a bank account, your balance only changes if you spend money or earn interest.
  • Knowing your balance will remain steady can offer a sense of financial control.

Possible drawbacks

Drawbacks could include:

  • Your savings may not grow over time, depending on interest rates
  • You’ll need to manage a lump sum
  • You can’t always pay back into super if you change your mind

Over the course of your retirement, the cost of living is likely to rise. For the best chance of maintaining your lifestyle through retirement, your retirement savings needs to grow too.

Despite low interest rates before and during the 2020 global pandemic, interest rates are creeping up to curb inflation (at the time of publication). However, interest earned on savings in a bank account are still relatively low. If you withdraw your super and deposit it into a savings account, it may see little to no growth over your retirement years. This will depend on your account type and balance of course. In addition, the rising costs of common household goods and services – due to inflation – could mean any savings you have may not last as long as you planned.

Another factor to consider is that you’ll need to manage a lump sum. To suddenly see a large amount in your bank account can be overwhelming, especially if you’re used to receiving a regular salary during your working life. You’ll need to feel confident managing your budget over a long period of time.

You also need to know that if you change your mind and want to put your savings back into super, you may not be able to. Age and contribution restrictions may prevent you from paying back into your super without paying additional tax. Before you make any decisions it can help to speak to a qualified financial adviser.

Your super savings are meant to give you the financial freedom to live the lifestyle you want. So choosing an income option that’s easy to manage is an important step in planning your retirement.

Choosing an income option that’s easy to manage is an important step in planning your retirement.

Option 2: Keep your money invested in an account based pension

Growing your savings in retirement is not always something people think about. But with inflation and rising living costs, it’s an important factor to consider. When you were working, your salary may have increased over time to balance price rises. In retirement, your super needs to do the same. For example, an account based pension invested in a diversified mix of assets could help your balance grow and keep up with the rising cost of living.


A hand hovers over a digital tablet, considering the benefits of an account based pension
Benefits of an account based pension

Benefits can include:

  • Your retirement savings stay invested
  • You still have flexibility to access your saving

With an account based pension, you could keep your super invested. This means you leave that money in the hands of investment experts after you retire. You also have the flexibility to withdraw money when you need it.

With an account based pension you can:

  • Turn your savings into an income stream in retirement
  • Choose how much, and how often you want your payments3
  • Withdraw additional money at any time
  • Meet your day-to-day expenses.

Plus, the fact that your super stays invested means your balance could continue to grow.

Read more: Compound interest and how it grows your super

 

An account based pension – such as AustralianSuper’s Choice Income account – offers you a range of investment options. These options are designed to grow your savings over the course of your retirement by keeping them invested. Plus, with an account based pension, these investment returns are tax-free.

Understanding each investment option can help you select one that meets your personal financial needs – such as a short, mid or long-term investment goal. For example, the Choice Income Balanced option means you’ll be invested in a variety of asset classes over the medium to long term. The investment aim for this option is to beat the consumer price index (CPI) by more than 4% per annum, over the medium to longer term. So, with the Balanced option, you may achieve a return that outpaces inflation and grows your balance, even in retirement.*

Of course, you can’t predict investment returns, but AustralianSuper’s Balanced option has a strong long-term performance history4 and an experienced team dedicated to improving your retirement outcome.

Choosing an option that aims to grow your retirement balance is one way to help your retirement savings last. When making a selection, you should always consider how you feel about risk, how long you’ll be investing for and your current financial situation.

 

Explore: Choice Income account based pension

 

Possible drawbacks

All decisions require a balanced approach. Drawbacks could include:

  • All investments have some level of risk, so you need to be comfortable with your choice
  • Your balance may fluctuate as markets change
  • You need to be comfortable with changing market conditions
  • Returns aren’t guaranteed

Choosing investment options that provide the best opportunities for growth can carry some risk. This means you may see your balance fluctuate over time. Investment markets move in cycles, so periods of growth, plateauing and declines can be expected. As with any long-term investment strategy, you may need to weather the storm of a declining cycle and give your balance time to recover, before taking out a large portion of your savings.

While it might be alarming to see your savings drop, you need to keep a long-term focus, even in retirement. Taking a large amount of your money out of your account, or choosing to switch investment options if the market falls, could lock-in losses and make it harder for your account to recover.

Understanding the risks of switching

 

Since returns aren’t guaranteed, it’s important to look at a fund’s past performance and any associated costs. Plus, it’s good to know how your super is invested. There’s a lot to understand, and several choices to make. Consider speaking to a qualified financial adviser or your fund to get the right advice for you.

 

The importance of growing your money in retirement

The costs of daily items such as bread, milk and public transport are predicted to rise over the next 30 years. This means your day-to-day living costs will go up over the course of a 20+ year retirement. To maintain your lifestyle, your retirement savings need to grow.

Increasing living costs
Visual shows the price of items like a loaf of bread ($2.80) and a litre of milk ($1.65) in 2021 and the forecast price of these items in 2051, assuming a 2.5% inflation rate each year." title="Visual shows the price of items like a loaf of bread ($2.80) and a litre of milk ($1.65) in 2021 and the forecast price of these items in 2051, assuming a 2.5% inflation rate each year.

The above examples assume an annual inflation rate of 2.5% each year.

 

As you can see, a loaf of bread is expected to be $5.90 in 2051, and a bottle of milk $3.45 – both over 50% more than the average cost in 2021. It’s important to factor this into your retirement planning.

 

Investing to outpace inflation

AustralianSuper aims to grow your balance during your working life and in retirement. Members have a range of investment options to suit different needs and most have an objective to outperform inflation. These options are designed and managed by a team of over 170 investment experts working across the globe.

Let’s look at 3 of the fund’s diversified options and view their return objectives and performance over 3, 5 and 10 years, for Choice Income account holders:

  • Balanced
  • Conservative Balanced
  • Stable

 

3 Choice Income options designed to beat inflation
Investment option Balanced Conservative Balanced Stable
Investment aim CPI + 4% over the medium to longer term CPI + 2.5% over the medium term CPI + 1.5% over the medium term
Minimum suggested timeframe for investment At least 10 years At least 5 years At least 3 years
Performance (Choice Income) - As at 30 June 2022
3-years per annum 6.04% 4.36% 2.66%
5-years per annum 7.89% 6.12% 4.42%
10-years per annum 10.27% 8.41% 6.38%
Source: AustralianSuper returns to 30 June 2022. Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.

 

As you can see, the investment objective varies for each option, and so do the returns. You can pick an option which best fits your needs and objectives, such as how much growth you want, or how much stability you want for your savings. When considering your options, it can help to know what advice is available and consider talking to a qualified financial adviser with experience in retirement planning.

Read more: Your pre-mixed investment options

 

The Balanced option is designed to outpace CPI (inflation) by 4% over the medium to longer term, the Conservative Balanced option by 2.5% over the medium term, and the Stable option by 1.5% over the medium term. All 3 options have delivered Choice Income account holders a positive return over 3, 5 and 10 years to 30 June 2022.

View Choice income performance

 

Consider retirement planning advice

The decision of what to do with your super savings isn’t always easy. It can be helpful to seek financial advice from a retirement planning specialist. Asking important questions and receiving information tailored to your circumstances and financial goals can help you make informed decisions about what to do with your money in retirement.

 

Connect with a financial adviser today

 

References:

  1. Ong, R., Wood, G., Cigdem, M., and Salazar, S. (2019) Mortgage stress and precarious home ownership: implications for older Australians, AHURI Final Report No. 319, Australian Housing and Urban Research Institute Limited, Melbourne, https://www.ahuri.edu.au/research/final-reports/319, doi:10.18408/ahuri-8118901.
  2. Retirement Confidence Index, AustralianSuper and Monash University
  3. Depending on your age, there is a minimum amount you must withdraw as a pension payment from an account based pension each financial year. Read more australiansuper.com/retirement/retirement-income-account
  4. AustralianSuper Balanced investment option compared to the SuperRatings Fund Crediting Rate Survey - SRP50 Balanced (60-76) to 30 June 2022. Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns
Investment returns aren’t guaranteed. Past performance isn’t a reliable indicator of future returns.

This may include general financial advice which doesn’t take into account your personal objectives, financial situation or needs. Before making a decision consider if the information is right for you and read the relevant Product Disclosure Statement, available at australiansuper.com/pds or by calling 1300 300 273. A Target Market Determination (TMD) is a document that outlines the target market a product has been designed for. Find the TMDs at australiansuper.com/TMD.

AustralianSuper Pty Ltd ABN 94 006 457 987, AFSL 233788, Trustee of AustralianSuper ABN 65 714 394 898.

 

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