Retirement marks a new chapter; one where financial security is crucial to enjoying the fruits of hard work. Australian retirees have access to various income streams, each with unique benefits and considerations. This article will walk you through the main retirement income streams popular today.
The right mix of retirement income streams will depend on your individual needs and circumstances, which might include:
- Your fixed and variable income needs in retirement
- Whether you will need to access some of your retirement savings as a lump sum in the future
- How important qualifying for social security benefits such as the Age Pension is to you
- Your estate planning needs, including whether you want to leave an inheritance to your dependants in the future
- Your tolerance for risk when investing.
The Age Pension
The Age Pension is a government-provided income stream aimed at supporting Australians of retirement age who meet specific income and asset test requirements. It’s a safety net for retirees who may not have accumulated sufficient superannuation savings.
As of 20 September 2024, assuming you meet age, residency and asset/income testing you could revive up the maximum $44,855.20 per annum for a couple, or $29,754.40 per annum for an individual.
Pros:
- Provides a stable income, indexed to inflation
- Unaffected by market fluctuations
Cons:
- Not everyone qualifies
- The amount received may not be sufficient to meet all retirement needs
Government Benefits and Concessions
In addition to the Age Pension, the Australian government provides various benefits and concessions that can ease retirement expenses, such as the Commonwealth Seniors Health Card and the Pensioner Concession Card. These concessions help reduce healthcare, travel, and utility costs.
Pros:
- Helps lower living costs
- eligibility is sometimes extended beyond those receiving the Age Pension
Cons:
- Benefit amounts can be modest, and eligibility criteria must be met
Superannuation Account-Based Pension
Superannuation is a major vehicle for retirement savings, with compulsory contributions made by employers. Upon retirement, you can access your super in several ways, including as a lump sum, account-based pension, or annuity.
An account-based pension allows you to draw down on your superannuation balance in regular payments, which can be adjusted to suit your lifestyle.
Pros:
- Flexible payment options
- Tax-free income for those over 60
- Investment growth potential
Cons:
- Drawdowns based on age must be made, regardless of your cashflow needs
- The balance may deplete over time, especially if returns are lower than expected or if large withdrawals are made.
Annuities
Annuities are a structured financial product that allows retirees to receive a guaranteed income over a fixed period or for life. By guaranteeing your future income payments regardless of the underlying performance, the annuity provider effectively carries all the investment risk.
Purchased through superannuation or personal funds, annuities provide predictable income, making them an attractive choice for retirees who prioritize stability and security. They also offer flexible ownership options and indexing to protect against inflation.
There are several types of annuities, each with different structures and benefits. Here’s a look at the main types available:
Fixed Term Annuities provides income over a defined period, such as 5 or 20 years.
Lifetime Annuities provide income for life, offering a guaranteed payout regardless of how long you live. These are popular for those concerned about outliving their savings.
Inflation-Indexed Annuities adjust for inflation, ensuring the purchasing power of your payments remains consistent over time.
Pros:
- Favourable tax treatment (especially if purchased through superannuation funds)
- May be treated different under Centrelink assets and income testing leading to more favourable determinations of Age Pension entitlements
- Provides a secure income floor, which can cover essential expenses without market risk.
- Many annuities offer options to include spouse continuation or legacy features, which allow benefits to be passed on to loved ones if you pass away.
Cons:
- Less flexibility – once an annuity is purchased, your capital is generally locked in with limited ability to make withdrawals. You also have no choice of investments and can’t change your income once the annuity has commenced.
- Unless indexed to inflation can lose purchasing power over time impacting your standard of living.
For many retirees, annuities serve as the foundation of their income plan, ensuring that core expenses (housing, food, healthcare) are covered regardless of market conditions. Using an annuity alongside other income sources like superannuation pensions, investments, or part-time employment creates a more resilient retirement income strategy. However, due to the potential complexity and cost of annuities, financial advice is essential to ensure you select the right type of annuity and allocate an appropriate portion of your savings to it.
Investments Outside Super
Retirees often have investments outside of superannuation, which can supplement income. These may include property, shares, managed funds, or fixed-interest products like term deposits.
Shares and Managed Funds
Investments in shares and managed funds can provide income through dividends and capital gains, offering a potential for growth if managed carefully.
Pros:
- Potential for growth and diversification
- Can be managed for tax effectiveness (particularly the utilisation of franking credits to supplement income)
- Greater liquidity and flexibility.
Cons:
- Subject to market risks, which may impact income stability
- requires financial management and oversight.
Investment Property
Rental properties can provide consistent rental income and potential capital gains, but also come with responsibilities and risks.
Pros:
- Long-term appreciation potential and income generation.
Cons:
- Management responsibilities,
- Market fluctuations, and potential for periods without rental income.
- Less liquidity and flexibility compared to other investments.
Term Deposits and Bonds
Term deposits and government or corporate bonds offer low-risk, fixed-interest income.
Pros:
- Stable and predictable income.
Cons:
- Lower returns compared to other investments
- Limited access to funds during the term.
Downsizing
Your home can be a significant source of untapped wealth. Selling your home and moving to a smaller, more affordable property can free up capital and reduce living expenses.
- Pros: Generates a lump sum, reduces maintenance costs, and may improve lifestyle. Should you meet the right conditions, you can contribute up to $300,000 each into your superannuation.
- Cons: Possible emotional impact of leaving a family home; could affect Age Pension eligibility if assets exceed allowable thresholds.
Choosing the Right Income Mix for Your Retirement
Achieving a comfortable and sustainable retirement typically requires a mix of income sources tailored to your personal situation, goals, and risk tolerance.
For example, you could consider using a lifetime annuity to provide enough guaranteed income (along with any Age Pension you’re entitled to) to allow you to meet your fixed income needs in retirement, while using flexible payments from an account-based pension to meet your additional non-essential spending needs – as shown in the following graph
Here are a few considerations:
- Consider Your Lifestyle Goals: Think about your desired lifestyle, travel plans, hobbies, and health needs to estimate your retirement income needs.
- Manage Investment Risk: Diversifying your income streams can protect you from market risks and ensure stability.
- Consult a Financial Adviser: Retirement planning is complex, and professional advice can help optimise your income streams.