Superannuation or savings: Which to draw on first in retirement?

Mar 09, 2023
There is no one-size-fits-all answer to the question of whether retirees should draw on their savings or their superannuation first. Source: Getty Images.

As retirement approaches, one of the biggest financial decisions individuals face is how to manage their retirement funds.

Should retirees rely on their superannuation accounts or dip into their personal savings? It’s a question that many Australians grapple with, and the answer depends on several factors, including personal circumstances, retirement goals, and financial objectives.

While superannuation provides a reliable income stream, personal savings offer more flexibility and control.

In an effort to gain a greater understanding of which is the most attractive option, Starts at 60 explored the pros and cons of relying on superannuation and savings in retirement to help you make an informed decision about how to manage your finances during this phase of your life.

Source: Getty Images.

Drawing on savings first

Drawing on savings first can be an attractive option for retirees for a few reasons. Firstly, it provides flexibility in terms of how much money retirees can withdraw and when they can withdraw it. Retirees can decide to withdraw as much or as little money as they need, and they can do it at any time. This can be particularly useful in situations where retirees need to access money quickly, such as unexpected medical expenses.

Secondly, drawing on savings first can help retirees to avoid drawing down on their superannuation too quickly. The more money that retirees can leave in their superannuation account, the more it can earn interest and grow over time. This means that retirees will have a larger pool of money to draw on in the future.

Licensed financial planner and author of Smart Money Strategy, Luke Smith suggests that “using up available cash is a good way to maintain lifestyle and protect the longevity of the capital after considering the tax implications of not starting a pension for example.”

“Living off cash outside of super is generally easier as there is no ongoing administration to access to the funds, personal cash is also not impacted by the legislated minimum drawing rules from superannuation,” Smith said.

Head of Superannuation & Partnerships at Stockspot, Enid Lal advises that “when entering retirement, retirees should consider drawing from their savings first before dipping into their superannuation.”

“This is because the savings have already been taxed, and the retirees can access their savings without incurring any additional tax or penalties. In contrast, withdrawing from superannuation before the age of 60 may incur additional tax and penalties,” Lal explains.

However, there are also some downsides to drawing on savings first. One of the biggest risks is that retirees may run out of money too soon. If retirees withdraw too much money too quickly, they may not have enough money left to cover their living expenses in the future. This can be a particular concern if retirees are relying solely on their savings for income during retirement.


Source: Getty Images.

Drawing on superannuation first

Drawing on superannuation first is another option that retirees can consider. There are a few benefits to this approach. Firstly, superannuation is specifically designed to provide income during retirement, so retirees can be confident that they will have a reliable source of income for as long as their superannuation lasts.

Secondly, drawing on superannuation first can help retirees to preserve their savings for future expenses or emergencies. By relying on their superannuation for income, retirees can leave their savings untouched, which means that they will continue to earn interest and grow over time.

Although leaving your superannuation untouched allows it the opportunity to earn more interest, licensed financial advisor and author of On Your Own Two Feet, Helen Baker highlights that “depending on how the superannuation/pension is invested will determine if it is earning more than money in the bank – it will depend what the market is doing at the time and that changes daily.”

“Has the fund got enough diversification and direction to choose where payments come from i.e. protecting your investments from being sold at the wrong time, whilst allowing you to source funds for spending?” Baker explained.

There are also some downsides to drawing on superannuation first. One of the biggest risks is that retirees may exhaust their superannuation too quickly. If retirees withdraw too much money from their superannuation too soon, they may not have enough money left to cover their living expenses in the future. This can be a particular concern if retirees have not accumulated enough superannuation to provide for their retirement needs.

In order to access your superannuation, you will need to meet certain conditions of release, as set by the Australian government. These conditions include reaching preservation age, permanent retirement, or severe financial hardship.

In Australia, you can generally access your superannuation funds when you reach your preservation age, which is between 55 and 60 years old, depending on your date of birth. However, there are some exceptions, such as if you have retired or become permanently incapacitated. It’s best to check with your specific super fund for their rules and regulations regarding accessing your funds.

The actual physical process of accessing your superannuation can include:

  • Completing a withdrawal form from your super fund and submitting relevant documentation with an Australian bank account number.
  • Early release payments on compassionate grounds applications need to be made directly to the ATO.
  • Further details of conditions of release can be found in the disclosure documents of your superannuation fund and the ATO website.

Which Option Is Best?

There is no one-size-fits-all answer to the question of whether retirees should draw on their savings or their superannuation first. The decision will depend on a range of factors, including the size of retirees’ superannuation accounts, their expected income needs during retirement, and their tolerance for risk.

Lal explains that “the pros of drawing from savings first include tax benefits and flexibility, while the cons may include reduced investment returns over time”

“On the other hand, the pros of dipping into superannuation include tax advantages and potentially higher investment returns, while the cons may include tax and penalties for withdrawing before the age of 60,” Lal says.

As a general rule, retirees should aim to strike a balance between drawing on their savings and their superannuation. They should try to avoid drawing too much money from either source too quickly, as this can lead to financial stress and uncertainty.

It is important to understand the tax and withdrawal implications of both options, as well as the potential impact on your long-term financial security. While drawing from superannuation can provide immediate access to funds, it may also affect your retirement savings and future income. On the other hand, using savings may provide more flexibility but could also deplete your emergency fund.

Ultimately, it is important to seek advice from a financial professional and make an informed decision based on your specific circumstances.

IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

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