Retirement Income Streams
Where will your income come from once you stop working? If you're struggling to answer this question, it's time to seek our advice to help you plan towards the retirement lifestyle of your choice. The fact is, your income during retirement is likely to come from more than one source and will most likely vary over time, depending on market conditions, investment strategy and your individual circumstances. Planning is vital to be able to create adequate income for this important stage of your life.
Your income in retirement may come from a number of sources, including: super; investments outside super; part-time employment; government pensions; the release of home equity and the sale of your family home. There are benefits and risks associated with each income option, as well as different implications for the tax you will pay as a retiree. Seeking professional financial advice is important to help you develop an appropriate mix of income streams for your circumstances and goals, so that you can reduce stress in your retirement.
Overview of retirement Income streams
#1 Income from Super
Once you have reached your superannuation preservation age (between 55 and 60 depending upon your data of birth) there are different types of income streams that can be commenced. For example, there are pensions and annuities.
The most popular type of superannuation pension is an account-based pension (also called an allocated pension). They type of pension provides a regular income stream with only an annual mandatory minimum drawdown and no maximum limit. The 'life' of an account-based pension will be affected by factors such as the starting balance, the amount of pension drawn and investment earnings.
For those people who have reached their superannuation preservation age, but are not as yet retired, there's scope to use super money to commence a transition to retirement (TTR) pension. TTR pensions operate in a similar fashion to account-based pensions, but with TTRs there's an annual maximum cap drawdown of 10% of the account balance.
An alternative type of income stream to pensions is an annuity. An annuity provides a guaranteed income for a set time period that is chosen by you and may be a lifetime or a fixed number of years. An annuity offers peace of mind in that you will receive a fixed income over the selected time period, regardless of economic or market conditions.
#2 Income from investments outside super
Capital growth investments such as property and shares may be an effective option if you want to invest money for the long term (more than seven years). These investments generally increase in value over time and may also generate income in the form of dividends or rent. You may use dividends to supplement your income or to reinvest for further growth. Shares and property may be purchased directly; or you may prefer to invest in managed funds which own shares or property.
Interest bearing accounts and term deposits may also be a source for providing for daily living expenses and emergencies. Cash is readily accessible. There’s a high degree of security in holding cash with the prospect of earning income in the form of interest. Of course with cash based investments, the emphasis is on security and generating income; there are no prospects for achieving capital growth.
#3 Part-time employment
Working part-time gives you the chance to keep an interest in the work/business environment and to increase the amount of money you have when you do retire. Due to career breaks and lower incomes, many women, in particular, benefit financially from working longer on a part-time basis to help supplement their retirement incomes. While there are government incentives in place to encourage you to work, it’s important to consider that the income you earn can potentially affect age pension entitlements.
#4 Age pension
Your retirement income may include some kind of pension payment or allowance from the Government. Around 65% of older Australians rely on a government pension or allowance as their main source of personal income at retirement1. The most relevant pension for retirees is the age pension, but there are other options available such as carer’s payments and health concessions.
#5 Home equity release
If you are over 60, own your home and need some extra cash, you may consider using the equity in your home to help fund your retirement. There are potential benefits, however there are also risks which need to be considered, so it’s important that you seek financial advice. One option is a reverse mortgage. This is a complex product that can have a significant impact on your finances, relationships and quality of life in retirement. A reverse mortgage is a type of home loan that allows you to borrow money using the equity in your home as
security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these.
#6 Selling the family home
It’s likely that you will have substantial equity in your home or even own it outright by the time you are retired. Selling the family home is one way to free up cash for retirement. The money you receive may be invested in shares, term deposits, managed funds or superannuation. In selling the family home, consideration obviously needs to be given to alternative accommodation options for retirement.
Tax & your retirement income
Whatever your income streams in retirement, an important consideration is your tax liability. This will depend on the type of income stream, when you started it and what it was purchased with. This is an important matter that your financial advisor will take into account when helping you to plan your retirement income streams.
Seeking financial advice can be invaluable in helping you to set and work towards achieving your retirement goals. The issues are complex and you are likely to need professional help to develop a tailored plan that takes your unique circumstances into account. At Pacesetter, we have the experience to help you plan effectively towards living the retirement lifestyle of your choice. Contact us today on (07) 3808 2808 or email firstname.lastname@example.org
Pacesetter Financial Services and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306 trading as Fortnum Financial Advisers.
This information (including taxation) is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. Pacesetter Financial Services strongly suggests that no person should act specifically on the basis of the information in this document, but should obtain appropriate professional advice based on their own personal circumstances.