Martin, 68, recently retired and is considering withdrawing a $70,000 lump sum from his superannuation to purchase a new car, embark on a long-awaited holiday, and keep some funds in reserve. However, with recent market fluctuations, he’s concerned about the timing and potential long-term impact on his retirement savings.
Understanding the implications of lump sum withdrawals
When retirees such as Martin consider lump sum withdrawals, it’s good to know how these differ from regular income stream payments when taken from an Account-Based Pension (ABP). Notably, lump sum withdrawals from an ABP:
- Do not count towards the minimum annual drawdown requirements set by the government for ABPs. For instance, individuals aged 65–74 are required to withdraw at least 5% of their account balance annually.
- Can affect the longevity of retirement savings, particularly if taken during market downturns, potentially locking in losses.
The role of market volatility
Market conditions play a significant role in the decision to withdraw lump sums. With recent market dips, selling investments to fund a lump sum withdrawal could mean realising losses that might have been recovered over time. This scenario underscores the importance of sequencing risk—the danger of withdrawing funds during market lows, which can adversely affect the long term sustainability of retirement savings.
Extra considerations for Self-Managed Super Fund (SMSF) members
For those managing a SMSF, additional considerations come into play:
- Reporting requirements: Lump sum withdrawals must be reported to the Australian Taxation Office (ATO) via the Transfer Balance Account Report (TBAR) .
- Compliance: Ensuring that withdrawals meet the ATO’s guidelines and minimum payment requirements is crucial to maintain the fund’s compliance status.
Balancing flexibility with long term sustainability
There’s no doubt being able to mix regular income drawdowns and taking lump sums from your ABP offers flexibility. For big-ticket items like a car or a dream holiday, taking a lump sum can make good sense. But Martin is aware of the trade-offs: a large one-off withdrawal right now could reduce the income his super provides later.
Mixing lump sums with regular income
One option Martin is exploring is whether he needs to take the full $70,000 as a lump sum all at once. Could he instead:
- Draw an extra $20,000 this financial year to cover the car and part of his trip,
- Increase his regular income slightly to build up a spending reserve over the next year, and
- Leave the remainder invested to potentially benefit from future growth?
This approach may allow him to better manage tax, maintain flexibility, and reduce the risk of locking in market losses.
Tips for retirees in Martin’s position
Whether you’re withdrawing for lifestyle, emergencies or security, here are some key things to keep in mind:
- Plan ahead for large expenses: Setting aside funds in a low-risk option inside your ABP can give you certainty without impacting longer-term investments.
- Stagger your withdrawals: Spreading lump sums over time can smooth out the effect of market volatility and keep more of your money working for you.
- Review your investment mix with a long term view: Make sure your portfolio has enough liquidity to fund withdrawals without needing to sell growth assets during downturns.
Balancing now and later
Martin’s story highlights the balancing act many retirees face. Superannuation in an ABP (decumulation) provides generous access and flexibility, but that with that freedom comes responsibility.
For Martin, a single $70,000 withdrawal might meet his needs—but a smarter, staged approach could meet those same goals while preserving more of his super’s long-term income potential.
A mix of lump sums and regular income—when carefully planned—can offer the best of both worlds: lifestyle freedom today and financial confidence tomorrow.
If you’re weighing up your own withdrawal options, the Retirement Essentials Retirement Advice Consultation can help you map out the best combination of lump sums and income to suit your lifestyle and long-term needs.
We’d love to hear your approach
Have you made a large withdrawal from your super? What did you consider before taking it – and would you do anything differently now?
