Australians heading into retirement face a tough decision on how to access their hard-earned superannuation .
The question is: Should you opt for a lump sum, an income stream, or a combination of both?
And just like every broad-based question in life, it circles back to the cliched but truthful answer: "It depends".
That's not ideal for someone seeking a more definitive answer, but what you can do is understand the pros and cons of both routes to obtaining your money. Here's a breakdown to help you make an informed choice.
Options for accessing superannuation
When you retire, you can withdraw your super as a lump sum, convert it into an income stream, or combine the two. Each approach offers unique benefits and trade-offs.
A single payment provides you full control over your complete superannuation funds right away, allowing you to utilize them for settling debts, making investments, or indulging in well-desired extravagances.
Lump sums are typically tax-free for people aged 60 or above . However, not All funds provide this feature.
As per MoneySmart, this superannuation choice might attract you if you carry high-interest debts or plan to make substantial one-time buys, like reducing the size of your house.
However, investing significant sums initially might drain your retirement savings more quickly than anticipated, possibly resulting in reduced finances during your later years.
Investing beyond your superannuation could subject you to increased tax rates compared to what’s offered inside the super system, particularly when trading shares or real estate.
It largely hinges on what you project your yearly living costs will amount to. These projections should encompass elements such as vacations and doctor visits, among others. what type of retirement you wish for.
The viability of this option can also hinge on your ultimate superannuation account balance. Those with larger balances may find this choice more appealing.
How about generating an income stream?
When you have a steady flow of income, your superannuation gets transformed into consistent payouts, much like receiving a wage. These disbursements keep coming during your retirement, akin to a sinking fund, though they might be put back into investments as well.
This approach provides a consistent earnings stream, tax-free investment gains, and might assist in safeguarding your retirement funds for future years.
Revenue sources offer significant flexibility, enabling you to select payment schedules and amounts while adhering to minimum withdrawal requirements.
Nevertheless, the maximum amount you can move into a retirement-phase account is limited to $1.9 million due to the transfer balance cap.
Why not both?
A lot of people after retiring choose a blend of these options. They might withdraw part of their superannuation as a lump sum to handle upfront costs, while keeping the rest invested in an income stream for steady, ongoing financial support.
It seems like you're getting everything at once, but there are some catches.
Money continues to be utilized within the superannuation system, which means these funds may not be easily accessible when required. Others could find alternative investment opportunities where the capital might serve them better financially.
Once again, this depends on the specific circumstances, but there are several methods to tap into the revenue stream, such as account-based stream and annuities.
As stated by the Australian Tax Office, several tax offsets apply to the income portion as well.
Superannuation takeaway
Your choice between taking your superannuation as a one-time lump sum, an ongoing income stream, or combining both will depend on your individual situation.
Every choice comes with advantages and disadvantages, making it essential to weigh them all to guarantee your superannuation aids in fulfilling your retirement aspirations.
Regardless of the situation, having all the key information can assist in making sound choices.
The post Is it preferable to withdraw your superannuation as a one-time lump sum or an ongoing income stream? appeared first on The Motley Fool Australia .
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