19 Nov Making the most of your Retirement Income
Retirement is a life-changing event. After you stop working, you can find yourself with time to do the things you may not have could do before, like traveling, volunteering or spending more time with family and friends. 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.
Thinking about retirement
More Australians are considering putting off their retirement and working for longer. The most common factors influencing Australians on when to retire are personal health or physical abilities (40%), financial security (36%), and reaching the eligible age for an old age or service pension (15%)*. [*Source: Australian Business Statistics, Retirement and Retirement Intentions, Australia]
Whatever the reason, many individuals choose to phase into their retirement rather than moving into full retirement. This option provides several benefits and you can make this transition the start of a rewarding and happy retirement.
Things to Consider
Planning for your future: You may choose to phase into retirement because of financial security, because you are not ready for the sudden lifestyle change or because of both reasons. It’s vital that you share this decision with your financial planner to ensure that appropriate strategies are in place to extract the best outcome of this change in your life.
Our financial planner can build a transition to retirement strategy into your retirement plan that may lead to a considerable amount of tax savings in the long term, thereby increasing your retirement savings. Of course, whether this could be suitable to you will depend on your unique situation and needs, so you will need to discuss this in greater detail with your financial planner.
Consider your options: Through discussions with our financial planner, consider your options around reducing your work hours. You may wish to continue working, however at a reduced number of days or hours to allow some freedom in your lifestyle.
If you are self-employed: You may need to start thinking about your succession plan. It’s important to structure the best solution that will deliver the best result for your retirement plans. It’s important you seek professional assistance with these matters to ensure ultimate results with value, tax and legal matters.
Review your financial position: As part of your retirement planning, be sure to review your current and desired position with your finances. Understand what you can achieve and work with a financial professional to find strategies to boost your retirement savings if necessary.
Evaluate your lifestyle needs: Another part of your retirement planning process is evaluating your lifestyle now and for the future. It’s important to discuss how you would like to manage your lifestyle in retirement and ensure sufficient retirement savings are in place to support this.
Thinking about transitioning into retirement is both exciting and a little scary. Uncertainty is inevitable: There is no perfect time to retire or perfect retirement plan. Focusing on the issues and risks discussed here —and asking some tough questions — should help you make sensible choices about when, and how, to retire.
When —and how —should you retire?
The answer to this question is never simple. You approach retirement armed with a lifetime of experience but at the same time you have no idea what to expect. Making the transition with confidence requires careful attention to many interconnected issues.
Individual experiences will vary widely, influenced by a host of factors, including family circumstances and the prevailing economic and market environment. But there are a few crucial questions everyone should consider in making a retirement plan. The overarching goal: to make sure you can live the lifestyle you want the rest of your life.
How long will you live?
It’s not a pleasant thought, but contemplating how long you will live matters hugely for retirement planning. Longevity risk, or the potential to outlive your retirement savings, is by far the biggest worry cited when moving into retirement. This life stage may last 30 years or more, so be conservative by building a retirement strategy that aims to cover spending needs for that time frame.
How much will you spend?
Whether it is a percentage of per-retirement income or a percentage of wealth at retirement, rules of thumb can provide helpful guidance as to what you can afford, but in practice they are impractical and inefficient. A more fluid approach to drawing on savings that adapts withdrawal rates and asset allocation in response to changes in economic and market environments and shifts in personal circumstances can produce a better outcome.
How fast will prices rise?
Rising consumer prices and higher inflation is the scourge of any fixed income investor because over time rising prices eat into what that income can buy in ‘real’ terms. Investment strategies for retirement should include growth and income-generating assets to help protect against the corrosive effects of inflation.
What will the market be like when you retire?
In the decades before retirement, when you’re saving and investing for the long term, when you make investment returns makes no difference. The wealth you end up with reflects the long-term average of your lifetime returns. But once you retire, and shift from being savers to spenders, the timing matters a lot.
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. There are different rates of Age Pension payments for single people and couples. Your rate also depends on your income, assets, and other circumstances.
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.
To know more about the recent changes in Age Pension click here!
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.
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.
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.
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 our financial planner. It can make all the difference to your financial success in retirement.
Should you have any immediate concerns or questions about your financial planning goals and investment strategy please get in touch with our team at iAdvice or call (03) 8658-8875.
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