15 August 2023
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. One option is opening an account based pension such as our award-winning Choice Income account1. An account based pension keeps your money invested with your super fund, but lets you access it as needed. Another option is putting your savings into a bank account such as a term deposit or savings account.
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 – a mortgage for example.
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 – opening an account based pension or putting your money in the bank.
Option 1: 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’re 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.
Benefits of an account based pension
With an account based pension you can:
- Keep your savings invested, giving you the potential to generate income in retirement
- Turn your savings into regular income payments in retirement
- Choose how much and how often you want your payments3
- Meet your day-to-day expenses
- Keep the flexibility to access your savings when you need
By keeping your super invested with an account based pension, you can leave that money in the hands of investment experts after you retire. Or you can choose more hands-on investment options that give you more direct control.
An account based pension – such as AustralianSuper’s award-winning1 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. The Choice Income Balanced option has had an average return of 9.48% a year over 10 years to 30 June 20234.
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 and is designed to have medium to long-term growth, with possible short-term fluctuations. The investment objective 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.
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.
Understanding the risks
All decisions require a balanced approach. It’s important to remember:
- All investments have some level of risk, so you need to be comfortable with your investment 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 no-one likes to see their savings drop, it's important 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.
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.
Option 2: 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, whether your money is in a term deposit or savings account, you’ll have to manage a lump sum for your entire retirement, which could be 25 years or longer. This can be overwhelming for some people.
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.
Drawbacks could include:
- Your savings may not grow over time, or at least outpace inflation, 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.
At the time of publication, interest rates have been increasing to curb inflation. However, interest earned on savings in a bank account are usually 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 as age and contribution restrictions may prevent you from paying back into your super. 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.
Other things to consider
The importance of growing your money in retirement
No matter how you decide to fund your retirement, you’ll want to make your super last.
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
The above examples have assumed an annual inflation rate of 2.5% each year.
As you can see, a loaf of bread is expected to be $6.71 in 2053, and a litre of milk $4.30 – both over 50% more than the average cost in 2023. It’s important to factor this into your retirement planning.
While we have used an average inflation rate of 2.5% in the above examples. It’s important to note that the actual inflation rate could be higher or lower. Over the twelve months to the 30 June 2023 quarter, the CPI rose 6.0%.5
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 almost 330 investment experts working across the globe.
Let’s look at 3 of the fund’s diversified options and view their investment objectives and performance over 5, 7 and 10 years, for Choice Income account holders:
- Conservative Balanced
3 Choice Income options designed to beat inflation
|Investment option||Balanced||Conservative Balanced||Stable|
|Investment objective||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 7 years||At least 5 years|
|Performance (Choice Income) - As at 30 June 2023|
|3-years per annum||8.95%||5.99%||3.35%|
|5-years per annum||7.31%||5.60%||3.90%|
|10-years per annum||9.48%||7.61%||5.77%|
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.
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.
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.
- AustralianSuper received the Canstar Outstanding Value Award for Account Based Pension in 2022. Awards and ratings are only one factor to be taken into account when choosing a super fund. For details view canstar.com.au/star-rating-reports/account-based-pensions/
- AustralianSuper and Monash University. (2022). Retirement Confidence Index.
- 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
- AustralianSuper returns to 30 June 2023. Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.
- Australian Bureau of Statistics (Jun-quarter-2023), Consumer Price Index, Australia, ABS Website.