Retirement is a life-changing event. After you stop working, you can find yourself with time to do the things you may not have been able to do before, like travelling, volunteering or spending more time with family and friends so making the most of your retirement income is essential.
As you adjust to this new lifestyle, you'll also need to think differently about your finances. In retirement, your priority typically changes from saving, in preparation for when you leave the workforce, to carefully spending those hard-earned savings. It's likely that your initial focus will be to find a way to replace your salary or wage with cash flow from other sources.
The composition of your retirement income requires careful planning. Your retirement income may come from more than one source.
The Age Pension is an income support payment offered by the Government to older Australians who meet the relevant eligibility criteria.
With maximum payments of $21,912.80 p.a. for a single pensioner and $33,035.60 p.a. for pensioner couples (including the Pension and Clean Energy Supplement and current for the period 20 March 2014 to 19 September 2014), the Age Pension probably won't be enough to afford most people a modest post-work lifestyle of basic activities, let alone a comfortable lifestyle.
To afford even a modest lifestyle in retirement, many people will need to supplement the Age Pension with other income. This could come from an annuity, an account-based pension or other investments.
An annuity (from within or outside super)
An annuity is a simple, secure financial product that guarantees a series of payments, for a fixed term or for life, in return for an upfront investment. The earning rate is fixed at the outset, and this applies for the length of the annuity, regardless of share market movements or interest rate fluctuations. Capital can be returned at the end of the agreed term or gradually during the term of the annuity as part of the regular payments.
An account-based pension (from your super)
An account-based pension is an investment account which gives you the ability to choose from a range of investments and can vary from time to time with the level of income you wish to draw subject to the minimum annual withdrawal amounts set by the Government. Account-based pensions are usually market linked. This means that the capital value is linked to the performance of the underlying investments, which can impact the level and duration of your savings and the income produced. Account-based pension providers, which may include your super fund, charge management and/or administration fees for these products. This reduces your investment returns.
These are just some of the types of investments that can sit within your super fund (personal or self-managed superannuation fund) or outside superannuation.
• Term deposits are fixed term, fixed interest savings account. Terms generally range from one month to five years.
• Shares pay income in the form of dividends. You can invest in shares directly or via managed funds.
• An investment property is real estate which has been purchased with the intention of earning a return on the investment, either through rent, the future resale of the property, or both. Another type of property investment is a property trust, which is a managed fund that enables investors to pool their money to purchase an interest in a portfolio of real estate assets.
Income from various sources can be 'layered' to meet your income requirements. This can be set up so that more secure income, such as from the Age Pension or an annuity, can cover your essential costs of living, while your income from other sources can fund your discretionary spending.
This approach can also allow your more growth-oriented assets to remain invested, giving them time to grow.
Source: Challenger, May 2014
Since each person is different, there is no single retirement income solution. More than one investment strategy and product may be required so it's important you receive professional help from your financial planner. It can make all the difference to your financial success in retirement.