What is Retirement Income?
Do you know what retirement income is? It might seem obvious – retirement income is what you get paid after you retire, right? But where does it actually come from? In reality there are many different sources of income in retirement, and it can be tricky to piece them all together and be certain you have enough money to cover all your expenses for life. But don’t worry! This article will give you all the information you need to know about retirement income.
Government Benefits
One of the most common sources of retirement income is government benefits. For example, the Age Pension provides a monthly payment to most Australians at some point in their lives – even if they’re fairly well off. The age requirements vary, but most people reach eligibility age when they turn 67 years old. The amount of the payment also varies depending on your circumstances, but it can be over $40,000 per year for couples.
To learn more about the different government benefits that are available during retirement, you can visit the Department of Human Services website.
Superannuation
Superannuation, or “super” for short, is another common source of retirement income. While you’re working, your employer generally pays 10.5% of each paycheck into your super fund. This can be a great way to save for retirement, as the money will grow over time thanks to compound interest.
You can also make extra contributions to your super plan, which will help you accumulate even more savings. When you reach age 60, you can start to access your super tax free.
Once you’ve fully retired from the workforce or reached age 65 you can access your super, without restrictions. Withdrawing your super can be done in four ways:
Lump-sum withdrawal: Withdraw some or all your super at once and use it however you like. This is a good option if you need a large amount of money to cover a one-time expense, such as home repairs or medical bills. But you’ll have less left over to provide you with income afterwards.
Account-based pension (ABP): This is really a lump sum investment that you make regular drawings from to give you ‘income’. It’s important to realise that ‘income’ you get from an ABP is partly from your investment returns but partly it’s mainly from drawing out your initial lump sum. If you draw too much it will run out.
ABPs offer flexibility and you can normally choose what investment option your money is in. You can choose how much money you want to draw out each month, and you can change that amount at any time. You are required to draw a minimum out each year though. The minimum is 4% of your balance for people aged under 65, 5% for those between 65 and 74 and then it goes up at key ages to 14% for people aged over 95.
‘Lifetime’ annuity or pension: A type of income stream that provides regular payments to retirees for life – no matter how long they live. It’s important to remember that once you purchase a lifetime annuity, there may be restrictions on how much you can withdraw or receive on death. Some of the most common types of lifetime annuities include:
- Joint and survivor annuity (JSA): provides payments to two people, usually a retired couple. The payments will continue even if one person dies.
- Deferred annuity: allows you to delay receiving payments until you reach a certain age. This can be a good option for retirees who want to keep their money invested for longer.
- Inflation linked or investment-linked: The level of payments move in line with an inflation index or an investment portfolio
Super transition to retirement (TTR): For people working after 60, TTR pensions allow you to gradually transition into retirement by reducing your work hours while drawing some income from your super before you fully retire.
Part-time Work
For a growing number of Australians, retirement is not a ‘hard stop’ from working. Many Australians choose to continue working part-time in the early stages of retirement. This can be a great way to supplement your other income and help you cover your expenses. It takes pressure off spending down your super and other savings. Working part time can help you stay active and engaged in your community. It can also give you a sense of purpose and help you combat boredom or loneliness.
Of course, there are a few things to consider before you start working part-time during retirement. For example, you will need to make sure that the job you choose is compatible with your current lifestyle. You will also need to be realistic about how much money you can expect to earn and the impact it has on your Age Pension entitlements.
Investment Property
When you own an investment property, you can rent it out to tenants and collect monthly rent to supplement your other sources of income. In the long run, the property will likely increase in value over time. This means that you can sell the property at a later date and receive a lump sum of money that can be used to cover additional expenses during retirement.
There are a number of things to consider when it comes to owning an investment property in retirement. For example, you will need to make sure that you have enough money to cover the costs of owning and maintaining the property – even if it’s empty for a period. You will also need to find reliable tenants who will pay their rent on time and take good care of the property.
Savings Accounts and Term Deposits
One option that many people consider is using their savings to cover their expenses. There are a few things to keep in mind when using your savings as retirement income. For example, you need to make sure that you have enough money saved up to cover your costs for a long time. An increasing number of retirees reach their mid-90s and 100’s. You’ll need to be careful not to spend all of your savings too quickly. It’s important to remember you’ll likely need this money to cover you for a large number of years, so you’ll need a careful cashflow plan.
Company Shares and Dividends
When you own shares in a company, you are entitled to receive a portion of the company’s profits. This money is known as a dividend and it is paid out to shareholders on a regular basis. The size of the dividend payout will vary from company to company, but it can be a helpful way to supplement your other sources of retirement income.
Another benefit of owning company shares is that the value of the shares will likely increase over the long term. This means that you can sell the shares at a later date and receive a lump sum of money that can be used to cover additional expenses during retirement. Of course, the value of the shares can go down as well as up, so you could lose money if you sell them at the wrong time. You may also need to pay taxes on any dividends you receive.
Cost of Living Over Time
Australia has one of the highest life expectancies in the world. This means your retirement income probably needs to last a very long time. An increasing number of people live into their mid to late 90s. To be confident you won’t run out of savings later in life, your retirement income needs to last for much longer than just ‘average’ life expectancy.
Over the course of your retirement, the prices of things will go up. Take bread for example. In 2020 the average cost of a loaf of bread was $3.06. That’s more than double what it cost in 1990. A similar story applies to other things people buy. 250g of butter cost $5.75 in 2020 whereas in 1990 a pound of butter only cost $2.09. These trends will continue.
Retirees need to allow for living cost increases when designing their long term cashflow plans. Jubilacion can help you to make sensible assumptions about managing your savings and cashflows to allow for future cost increases.
Another thing to keep in mind is that some retirees will be subject to taxes. This means that you will need to make sure you have enough money to cover the taxes you may need to pay. You should also consider how using your savings will impact your other sources of income, such as the Age Pension. The Age Pension is subject to means testing which means that if you have a lot of assets or other income you’ll get less (or none). But if you spend your savings over time then the amount you receive from the Age Pension might increase. Jubilacion are experts at taking these rules and variable cashflows into account.
As you can see, there are a number of different sources of retirement income available to you. It’s important to work with an expert to build a robust cashflow plan before making any decisions about your retirement and retirement income. Working with a specialist will help you to model your unique situation and set appropriate assumptions that take uncertainty and you key decisions into account.
The biggest question, ultimately, is how much money do you need to save to live comfortably for the rest of your life? Talk to Jubilacion today for expert modelling of your retirement. This will empower you to look forward to retirement with confidence.
