You’ve done the hard-yards, you’ve contributed to society and you’re feeling a bit buggered. You’ve decided it’s time to turn over a new chapter in your life and do all the things that you’ve never had the time or the money to do. But now you do! It’s time to retire. But, where are you going to get your retirement income streams from?
Here’s a few ways.
Retirement Income Streams
There’s a number of ways that you can cover your retirement expenses upon reaching retirement age. Most people will have more than one form of retirement income streams that collectively allow you to cover your retirement expenses.
Here are seven of the most common sources of retirement income to cover your expenses in retirement.
1. Superannuation Pension
One of the most common source of income in retirement is via superannuation income stream, often known as an account-based pension or retirement phase income stream. These are often widely considered the best retirement income streams also, due to their flexibility and the fact that all investment earnings are received tax-free.
An account based pension can be started once you have retired and are eligible to access your superannuation by converting your accumulation savings into an income stream.
An account-based pension is a flexible retirement income stream, as it allows you to receive as much income as you need to meet your needs, subject to a minimum annual pension amount.
The downside of an account based pension is that it is not guaranteed to provide you with an income for the remainder of your life. The longevity of an account-based pension is determined by your level of pension drawdowns and the investment earnings within the account. Once the account balance reaches $0, no further pension payments are received.
Read More: Can I Start an Account Based Pension?
In the lead-up to retirement, you may even consider a transition to retirement pension. A transition to retirement (TTR) pension can be started even if you are still working and is similar to an account-based pension, but it has an upper threshold cap on the amount of income you can receive each year. In order to start a TTR pension, you need to have reached your superannuation preservation age.
Read More: Can I Start a TTR Pension?
It’s important to know your options at retirement, so that you can decide what’s best for you. This video helps you to understand what happens to your super when you retire.
2. Age Pension
The Age Pension is a social security payment paid by the Australian Government through Centrelink. The Age Pension is means tested based on your level of income and assets.
Not everyone is eligible for Age Pension payments, but most Australians will receive some level of Age Pension payments at some stage in their lives.
Your eligibility for Age Pension payments is mostly determined by your age and your level of income and assets.
Different income and asset thresholds apply based on whether you are single or a member of a couple and whether you are a homeowner or non-homeowner.
Centrelink will apply both an Income Test and Assets Test to your situation on a continuous basis to calculate your entitlements. Whichever test results in you being eligible for the lowest level of Age Pension payments is the test that will be applied.
The inclusion of Age Pension payments now or in the future should not be discounted when preparing your retirement plan.
3. Rental Income
Not all retirement income needs to be funded by superannuation or social security payments. There can be benefits in having investments in your personal name to assist in covering retirement expenses, also.
You may consider a residential or commercial property as part of your overall retirement plan. A property can provide regular income from tenants, as well as potential growth in the value of the property.
However, there are some risks if you were to rely largely or solely on rental property income. Having all of your retirement nest egg tied up in one or two properties, relying on uninterrupted tenancy, dealing with expected and unexpected running costs and the inability to drawdown on capital (i.e. you can’t just sell the bathroom if you need a lump sum), could spell disaster for your retirement plan.
A good retirement plan should always include a reasonable level of diversification and access to capital when required.
Property investments have a relatively high level of investment risk and the value of a property is generally cyclical.
Owning shares in your personal name can also be part of your retirement income strategy. Many Australian shares have the added benefit of providing tax-effective income in the form of imputation credits.
Shares can provide both income returns (dividends) as well as capital growth (increase in share price) but like property, are considered to be a relatively higher risk investment with volatile share prices and fluctuating dividends. Owning shares in several sectors, industries and companies can reduce overall risk.
Read more: Retirement Investment Strategies
5. Annuity Income
An annuity income stream is generally a guaranteed income stream provided by a life insurance company.
In exchange for a capital lump sum, you receive an agreed upon income stream for a predetermined time frame, such as a number of years or for the remainder of your life. At the conclusion of the time frame (known as the maturity date), you or your beneficiaries receive either all, some or none of the initial investment sum, depending on what you chose to occur at the commencement of the annuity.
The amount of capital received at maturity is known as the residual capital value (RCV). If you choose a 0% RCV you will receive higher income payments for the life of the annuity, if you choose a 100% RCV you will receive lower income payments and anything else will be in-between.
The interest rate offered will be influenced by general interest rates at the time of commencement and payments can usually be received monthly, quarterly, semi-annually or annually. You may also choose to have payments increase with inflation, which will start off lower and increase over time, compared to having static payments which will remain the same throughout until maturity.
The benefit of the annuity is that it gives you certainty as to how much you will receive and when you will receive it. However, overall long-term average returns are generally lower than growth-oriented investments, such as shares and property.
6. Defined Benefit Pensions
A defined benefit pension is commonly associated with certain government and semi-government occupations or industries.
Defined benefit pension schemes are less common than they once were, but still form part of many retirement income plans.
If you are part of a defined benefit plan, you may be eligible to receive an income stream, a lump sum or a combination of a lump sum and an income stream at retirement.
A defined benefit pension works similar to an annuity, whereby a guaranteed income is received for the remainder of your life, increasing with inflation and may even continue to be paid to a surviving spouse in the event of your death.
However, unlike annuities, the amount of retirement income you receive from a defined benefit pension is not based on a lump sum capital investment, but rather is determined by your salary and years of service.
7. Bank/Term Deposit Interest
Finally, there is bank and term deposit interest as a form of retirement income.
Most professionals would not consider reliance on bank interest to be a sound retirement strategy, due to the effect inflation has on bank savings. Due to bank accounts and term deposits having no growth component (i.e. the price does not increase over time), the interest received from such investments loses its purchasing power during each year of your retirement. Also, interest rates are variable from month to month, which makes this type of retirement income unpredictable.
It is generally a good idea to have some bank and term deposit savings, in order to have immediate access to cash if required and as a protection against needing to sell growth assets during unfavourable market conditions, but having all of your retirement savings held in bank accounts and term deposits is often not ideal.
There may be times in your life, based on economic conditions, that make you wonder whether you should be converting your super to cash or withdrawing your total super balance and investing into bank accounts and term deposits in your own name. For the average person, this can be detrimental to their retirement plan. Watch this video to learn why:
How To Pay for Retirement?
The best way to pay for retirement is to first calculate your retirement income needs, expected travel expenses and any upcoming capital expenses. Then, determine how to arrange and invest your assets in a manner that will optimise your income, tax and Age Pension position having regard to your needs. This can easily be achieved by working with a specialist retirement planning adviser and putting in place retirement planning strategies.
What is the Best Source of Income in Retirement?
The best source of income in retirement is whatever provides you with the highest certainty of achieving your retirement income objectives with the lowest amount of risk. Usually, your sources of retirement income will be dominated by one or two of those noted above.
Ideally, you should seek personal retirement planning advice to optimise your retirement plan based on your personal objectives, age and situation. If this is something that you would like us to assist with, please get in touch with us here.
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