Moving into retirement: what changes, what doesn’t, and what to plan for

Think of building your super like filling a dam. For decades, water flows in (contributions, employer super, investment returns) and the level rises. Then one day, we open the floodgates and start drawing it down. What most people don’t realise is that the moment we open those gates, the rules of the game change almost entirely.

Retirement isn’t just a change of routine. It’s a fundamental shift in how our super is structured, taxed, and drawn down. And getting that transition right, or wrong, can have a significant and lasting impact on how far our money goes.

From accumulation to pension phase: what actually changes?

While we’re working, our super sits in what’s called the accumulation phase. Contributions flow in, the fund earns investment returns, and those earnings are taxed at a concessional rate of 15%.

When we retire and begin drawing an income from super, we move into the pension phase. The most significant change? Earnings on assets supporting an income stream are no longer taxed at all as the rate drops from 15% to 0%. For a substantial super balance, that’s a meaningful difference in how quickly the fund grows (or how slowly it shrinks).

There is, however, a cap. The transfer balance cap (currently $2 million, rising to $2.1 million from 1 July 2026) limits how much we can move into the tax-free pension phase. Anything above that cap stays in accumulation and continues to be taxed at 15%. For most people this isn’t a constraint, but it’s worth knowing about, particularly if both members of a couple have significant balances.

Moving into pension phase is one of the most tax-effective transitions available in the Australian super system. Getting the timing and structure right is worth the attention.

Transition to retirement: a strategy worth understanding

We don’t have to wait until we fully retire to access our super. From preservation age, which is 60 for most Australians, we can begin drawing a limited income stream from super while still working. This is called a transition to retirement (TTR) strategy.

TTR is most commonly used in one of two ways. The first is to reduce working hours without reducing take-home pay: we supplement the reduction in salary with a TTR income stream from super. The second is to boost super contributions: we salary sacrifice more into super (reducing taxable income) while drawing from super to maintain our living standards.

One important nuance: earnings in a TTR fund are still taxed at 15% and they don’t drop to 0% until we fully retire. And the income drawn is capped at 10% of the account balance each year. TTR isn’t right for everyone, but for those within a few years of retirement, it can be a useful planning tool.

Sequencing risk: why the first years of retirement matter most

Here’s something that surprises most people: the order in which investment returns arrive matters enormously in retirement, in a way it simply doesn’t during accumulation.

During our working years, we’re making regular contributions and averaging into the market over time. A bad year is frustrating, but it doesn’t derail the plan. In retirement, we’re doing the opposite and drawing down regularly, regardless of what markets are doing.

If markets fall sharply in the first few years after we retire, we’re forced to sell more units to generate the same income. This permanently reduces the number of units in the portfolio, meaning there’s less to benefit when markets recover. This is called sequencing risk, and it’s one of the most underappreciated risks in retirement planning.

Two people each retire with $800,000. Person A experiences -20%, -10%, then +25% in the first three years. Person B experiences the same returns in reverse: +25%, -10%, -20%. After three years of drawing $50,000 per year, Person A has around $551,000 remaining. Person B has around $594,000. Same total returns, different order but a $43,000 difference in just three years.

The practical response to sequencing risk is to hold enough in cash or lower-volatility assets to cover two to three years of income needs. This means we’re never forced to sell growth assets at the bottom of a market cycle just to meet living expenses.

The Age Pension: how super and Centrelink interact

For many Australians, super and the Age Pension will work alongside each other in retirement. The Age Pension is means-tested, using both an assets test and an income test, with the lower entitlement applying.

Super balances are counted as an asset once we reach Age Pension age (currently 67). The family home is exempt, but most other assets such as investment properties, shares, cash, and super are assessed. The assets test thresholds for a full pension are $321,500 for a single homeowner and $481,500 for a couple. A part pension is available up to higher thresholds.

What’s worth knowing is that the structure of our assets can affect our Centrelink entitlements in a significant way. For couples where one partner is younger than Age Pension age, for instance, the younger partner’s super may not be counted at all under the assets test. Getting this structure right before reaching pension age is one of the more valuable pieces of planning we can do.

The interaction between super, investment assets, and the Age Pension is one of the most complex areas of Australian retirement planning. It’s also one of the areas where good advice tends to pay for itself many times over.

The bottom line

Retirement isn’t a single event but a transition that unfolds over time, as much in our financial situation as it is in our adjustment to our new lifestyle. The decisions we make in the lead-up, and in the first few years after stopping work, shape the financial landscape for everything that follows.

Understanding how the pension phase works, whether a TTR strategy makes sense, how to buffer against sequencing risk, and how super interacts with the Age Pension are all part of getting that transition right. None of it needs to be overwhelming but it does need to be planned.

If you’re within five to ten years of retirement and haven’t yet looked closely at these questions, that’s a very good conversation to start now.