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How To Make The Most Of Your Retirement Income

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There’s no doubt that retirement is a life-changing event – one that many of us look forward to after years of hard work. You’ll finally have enough spare time to do the things you’ve dreamed of doing but haven’t been able to do before, such as travelling, or spending more time with family and friends.

But with this new lifestyle also comes the potentially-daunting change to your finances. You will probably find that, instead of concentrating growing your savings, you’ll be spending them to fulfil your dreams. Your initial focus, however, will probably be to find a way to replace your salary or wage with cash flow from other sources, or to budget with the funds available to you.

As your retirement income is likely to come from more than one source, such as superannuation, a pension, stocks or property, it is imperative that you spend some time to carefully plan how to make the most of your retirement income.

Age Pension

Most Australian citizens over the age of 65 are eligible for the Age Pension. This is an income support payment offered by the Australian Government (Age limits are going to rise in 2017).

Payments for a single pensioner do not exceed $22,211.80 a year, and for a couple he yearly amount is $33,488.00. (These figures applied for the period 20 September 2014 - 19 March 2015, but are likely to change) Therefore it’s likely that the Age Pension alone won't be enough to allow you to achieve your retirement dreams.

To afford even a modest lifestyle in retirement, many people will need to supplement the Age Pension with other income, such as from an annuity, an account-based pension or other investments.

As a recipient of the Age Pension, you will also benefit from the Pensioner Concession Card, allowing you access to health concessions as well as helping with the cost of living by reducing the costs of certain goods. Ensure that you use this to its maximum potential. You may also receive an energy supplement, rent assistance and other health assistance.

An Annuity (From Within Or Outside Super)

An annuity is a low-risk investment product that guarantees a series of payments, for a fixed term or for life, in return for an upfront investment. This investment can come from your superannuation or from personal savings. The earnings rate is fixed at the beginning of the investment, and stays the same 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. Annuities are particularly suitable for:

  • Those who are approaching retirement age and want a guaranteed income stream.
  • Those who are seeking guaranteed income for life in exchange for initial financial provisions.
  • Those making a succession plan who want to make specific provisions for beneficiaries.
  • Australian companies, trusts or funds with capital to invest in exchange for a guaranteed source of investment income.

Many different companies offer annuities, so shop around to find a deal that suits your individual circumstances.

An Account-Based Pension (From Your Super)

This is an investment account, which allows you to choose from a variety of investment options. The level of money that you regularly withdraw depends on the minimum annual withdrawal limits, which have been put in place by the Australian Government. These withdrawal amounts must be met to secure tax exemption for the investment earnings on the fund’s assets, which are financing your super pension. They are based on your age and the size of your account balance and is calculated at the beginning of July each year. For example, at the age of 65 you can withdraw a minimum of 5% of your fund, whilst at 95 or over this figure stands at 14%, with varying amounts in between.

Your account-based pension will more than likely be linked to the economy and stock markets. This means that the value of the super is linked to how underlying investments perform in the market, which in turn impacts how much your savings grow, how long you’ll be able to withdraw it for and how much income is produced. You can change how your money is invested at any time by doing an ‘investment switch’. This can affect either the money that is already in your super or any future contributions. Some super funds may charge for an investment switch, but it is best to speak to an advisor to see what your options are.

Other Investments Available To You

Here are just some of the types of investments that can sit either within your super fund (personal or self-managed superannuation fund) or outside superannuation.

  • Term deposits – these are an investment of cash placed with a financial institution for a fixed amount of time (the ‘term’). They are often referred to as TDs or CDs (certificates of deposit). Terms generally range from one month to five years, with the money only being released at the end of that term. Interest rates differ depending on the amount of cash you invest and the length of the term, as well as the bank that you choose, so it’s important to compare the different options available.
  • Shares – these generally pay income in the form of dividends. You can invest in shares directly or via some managed funds (or account-based pensions), available via a broker. Although they can be bought at sold at any time, shares aren’t a guaranteed source of income.
  • Investment property – this is real estate, which has been bought with the sole intention of earning a return on the investment. This can be either through rent (allowing a regular source of income), reselling the property for a profit, or both. Investing in property can be a costly exercise and can take up a lot of your time, especially if you choose to be a landlord, so consider these factors before buying. The ‘Pension Loans Scheme’ gives you the opportunity to receive a fortnightly loan from any capital that you have tied up in real estate. This is worth considering if you hit financial difficulties but are able to sell your real estate.

Continuing In Employment

It may sound odd to continue working once you reach retirement age, but for many it makes perfect sense. Employment keeps your social life continuing on the same track as well as giving you goals to achieve. Although you may not with to work full-time when you reach retirement age, you may choose to step down to a part-time role, or swap your high-intensity job for one that is more appealing to you. Not only can work bring continued confidence and meaning to your days, you will also benefit financially. Of course, you’ll have the wage that you’re earning. On top of that, the ‘Work Bonus’ scheme allows you to earn more without having your pension cut.

If you registered for the ‘Pension Bonus Scheme’ before July 2014 you could choose to go the whole way and continue employment as a main way of receiving an income when you reach retirement age. This allows you to defer the payment of your Age Pension, providing you with a lump sum reward for continuing to be a part of the workforce. This is ideal for anyone who isn’t ready to settle down to retired life straight away!

How To Plan Your Finances

Income from various sources can be 'layered' to meet your specific income requirements. It is a good idea to use more secure income, such as that from the Age Pension or an annuity, to cover your essential costs of living. This will then allow your income from other sources to fund your more occasional spending and treats such as vacations.

Taking this approach will allow your more growth-oriented assets to remain invested, allowing them to grow in value.

There is no single solution to making the most of your retirement income. It will differ greatly depending on the investments you’d made in the past, your individual outgoings and what your aims are for your retirement years. It is a good idea to have more than one investment strategy and product in place to allow you the flexibility and security of knowing that there are different options available. (This is especially important if you’ve invested in higher-risk strategies such as stocks). It's important to look for professional assistance from a financial adviser. After all, it can make all the difference to your financial success so that you’re free to enjoy your retirement.

For financial advice tailored towards your personal situation, please call TGFS Financial Planning today on 1300 755 521 or email trent@tgfsfinancialplanning.com.au

TGFS Financial Planning is an Authorised Representative of Consultum Financial Advisers Pty Ltd. ABN 65 006 373 995 AFSL No 230323 (Consultum).

This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser and seek tax advice from a registered tax agent. Information is current at the date of issue and may change.

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