After decades of working, saving and watching your super balance grow, switching from ‘saving mode’ to ‘spending mode’ can be surprisingly difficult.
For some retirees, seeing their super balance fall creates anxiety. Every holiday, new car or home renovation can feel like money that should have stayed safely invested. But superannuation has a purpose: to help fund your life in retirement. The challenge is deciding how much you can comfortably spend without compromising your future security.
There is no single correct withdrawal rate. How much you can afford to spend depends on your super balance, other savings and investments, Age Pension eligibility, housing costs, health, lifestyle and how long your money may need to last.
If you have an account-based pension, you must withdraw a minimum amount each financial year, calculated according to your age and account balance on 1 July each year. You can generally withdraw more when you choose, but taking larger amounts means your balance may run down more quickly.
That doesn’t necessarily mean spending more is a bad decision.
Spending often isn’t evenly distributed throughout your retirement. The early years can be the most active, with overseas trips, caravanning, dining out, hobbies and time with grandchildren. Later in retirement, some of these expenses may naturally decline.
It can therefore make sense to deliberately allocate some super to experiences while you are healthy enough to enjoy them, rather than concentrating solely on preserving the largest possible balance.
One approach is to mentally separate your retirement money into different buckets. Work out what you need for everyday living, maintain a comfortable reserve for unexpected expenses and future needs, then identify an amount you can confidently use for discretionary spending.
Before making a major withdrawal, however, consider the longer-term consequences. Account-based pensions are not guaranteed to last for life, and their longevity depends on how much you withdraw, investment performance and fees. Your super can also interact with Age Pension income and assets tests.
If you’re uncertain, retirement calculators can help model how different spending levels might affect your balance over time, while professional financial advice may be worthwhile before making significant decisions.
Ultimately, successful retirement planning isn’t about reaching the end of life with the biggest possible super balance. Nor is it about spending freely without considering tomorrow.
It’s about having enough confidence in your plan to use some of the money you spent a working lifetime accumulating – and enjoy what it was intended for.