One of the biggest questions Australians face when approaching retirement is: How much money should I keep in the bank, and how much should remain in superannuation?
After spending decades building your retirement savings, having enough accessible money for everyday expenses and unexpected costs is important.
However, keeping too much cash in the bank may mean missing out on potential investment returns and tax advantages available through superannuation.
So, what's the right balance?
One approach sometimes considered is maintaining enough accessible funds to cover approximately 12 months of living expenses, plus significant upcoming costs.
This is a general planning illustration, not a recommended amount. Your actual requirements will depend on your income, expenses, financial circumstances and access to other funds.
Importantly, not all your accessible money necessarily needs to sit outside superannuation.
1. Start With Your Living Expenses
Understanding your annual spending is a useful first step.
For example, if you expect to spend $80,000 annually in retirement, you might use this figure to explore how much accessible money you need.
That doesn't mean keeping $80,000 in your everyday bank account.
Some retirees maintain a smaller amount for regular spending and hold additional funds in savings accounts or other accessible arrangements.
It's also important to consider your retirement income.
If you receive regular payments from the Age Pension, an account-based pension or other sources, these may help cover everyday expenses.
Someone spending $80,000 annually but receiving $40,000 in reliable income may have different cash requirements from someone funding the entire amount through investment withdrawals.
The key consideration is having money available when you need it, without unnecessarily selling longer-term investments.
For some retirees, several months of accessible savings may be sufficient. Others may prefer a larger buffer.
2. Allow for Major Upcoming Expenses
Everyday spending is only part of retirement planning.
Larger expenses, such as replacing a car, renovating your home or taking an overseas holiday, can significantly affect your cash requirements.
Suppose your annual spending is $80,000 and you're planning to purchase a $40,000 car.
Using an illustrative one-year spending buffer, you might calculate:
$80,000 living expenses + $40,000 car purchase = $120,000 in accessible funds.
This is an example, not a recommended cash balance. The actual amount required may be lower once regular income and existing accessible funds are considered.
Planning for major expenses can reduce the likelihood of needing to sell investments at an inconvenient time.
It also helps distinguish between money needed soon and money intended to support your retirement over the next 10, 20 or 30 years.
3. Avoid Selling Investments at the Wrong Time
Investment markets naturally rise and fall.
While market fluctuations are expected, they can create challenges when you need to withdraw money during a downturn.
Imagine needing $30,000 for unexpected home repairs when your investments have recently declined in value.
Without sufficient accessible funds, you may need to sell investments while prices are depressed.
This could mean selling more investment units than otherwise necessary, leaving less invested to participate in any potential market recovery.
Holding accessible cash may provide flexibility during these periods.
However, cash doesn't necessarily need to be held outside superannuation.
Many super funds and retirement income products offer cash or defensive investment options.
For retirees who have satisfied the relevant conditions of release, these options may help provide for upcoming withdrawals.
Remember that cash held within super may still be subject to withdrawal processing times, product rules and access restrictions.
Cash also carries risks, including inflation reducing its purchasing power over time.
The aim is to balance short-term accessibility with longer-term investment needs.
4. Don't Overlook the Cost of Holding Too Much Cash
While accessible savings can provide peace of mind, holding excessive cash may have disadvantages.
For example, someone spending $100,000 annually who holds $300,000 in personal savings accounts has the equivalent of three years' spending in cash, before allowing for retirement income.
That may suit some circumstances, but it's worth understanding the trade-offs.
Interest earned on personal savings may be taxable, while inflation can gradually reduce purchasing power.
Superannuation may offer different tax treatment.
Investment earnings within accumulation accounts are generally taxed at concessional fund rates.
For eligible retirement-phase account-based pensions, investment earnings supporting the pension are generally exempt from tax within the fund, subject to applicable rules and limits.
However, this doesn't mean every spare dollar should automatically be contributed to super.
Contribution caps, eligibility requirements and personal circumstances matter.
Money withdrawn from super cannot necessarily be contributed back whenever you choose.
Reviewing your cash position regularly can help you understand whether your savings remain aligned with your expected expenses and retirement objectives.
5. Consider Tax and Centrelink Implications
Where you hold retirement savings can affect their taxation and Centrelink treatment.
Interest earned on personal bank accounts may be assessable income, while eligible retirement-phase superannuation pensions generally benefit from concessional tax treatment within the fund.
For Centrelink purposes, personal bank savings and accessible super balances are generally assessed once you reach Age Pension age.
Different rules may apply before Age Pension age, particularly where super remains in accumulation phase.
This means withdrawing money from super and depositing it into a personal bank account won't automatically improve your Age Pension entitlement.
Your age, partner's circumstances and retirement income arrangements can all influence the outcome.
Finding Your Retirement Sweet Spot
There's no magic number that works for everyone.
Some retirees may feel comfortable with a smaller cash reserve because regular income covers most expenses. Others may prefer more accessible funds.
A useful starting point is to consider your annual spending, reliable income, upcoming expenses and how quickly additional funds can be accessed.
Retirement isn't about having the biggest bank balance. It's about understanding when you'll need money and ensuring your savings can support your lifestyle over time.
Important Information
The 12-month cash buffer is an illustrative planning approach, not a universal financial rule. Superannuation access depends on meeting applicable conditions of release. Age Pension eligibility generally begins at age 67 and is subject to income, assets and residency requirements. Tax and Centrelink rules, investment risks and withdrawal conditions should be considered when making retirement decisions.
General Advice Warning: This article contains general information only and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on this information, consider whether it is appropriate for your circumstances and consider seeking professional financial advice. Where financial products are discussed, obtain and consider the relevant Product Disclosure Statement (PDS), where applicable, and other product documentation before making a decision.
