To offset the post retirement risks of longevity and inflation, investing in growth assets such as shares and property is required. However, many people are not comfortable investing in growth assets for fear of a downturn in investment markets and the associated impact of drawing down on your capital in the early years of retirement. This is known as sequencing risk.
This uncertainty leaves many apprehensive about investing.
To give you peace of mind that you will not run out of money and to reduce the impact of post retirement risks, here are 4 steps to create a secure retirement income stream:
Post Retirement Objectives
The first step is to consider what your post retirement objectives are. This requires consideration of your personal and financial goals covering all phases of retirement. You might consider your estate planning goals, aged care considerations, philanthropic values, accommodation, health and lifestyle objectives.
The objectives can be further broken down into income and capital goals and ranked in order of priority.
The income goal that you cannot afford to do without is called your lifestyle essentials. This covers your costs associated with accommodation, health, food and transport and aims to keep up a comfortable standard of living in retirement.
Post Retirement Income
You need to match you lifestyle essential costs to income that is guaranteed to last for the rest of your lifetime. The age pension is one source of guaranteed income. However, it is subject to means testing (which is getting harder to meet) and there is also some uncertainty as to the ability of the government to keep funding it indefinitely, which was identified in the recent intergenerational report.
Another source of guaranteed income are annuities. Annuities can be purchased from your existing superannuation savings to retain their tax effectiveness for retirement planning. Annuities can provide you with a guaranteed income for life, or for a certain period of time.
Considerations to keep in mind before your purchase an annuity are:
Costs can vary greatly between annuity providers. Saving a percentage point can have large impact on the funds you will have for retirement.
Some annuities can guarantee you an income stream no matter what happens in investment markets and on the other hand allow your capital base and income to grow if investment markets improve.
- Residuary Benefit
If at the end of your life or at the end of the term of the annuity, there is a residual amount left some annuity providers allow this to be transferred to your spouse or become an estate asset.
If your circumstances change and you wish to terminate the annuity before it expires, some annuities allow you to withdraw the balance
The return or income stream from an annuity is also impacted by the term you choose. You will need to decide what term is suitable for you based on your own retirement objectives and options available. It might be for a fixed term or for your life.
The return fluctuates depending on the features that are suitable to you such as the term and the ability to withdraw your funds.
- Strength of Provider
The ability for the income payment to continue for the term chosen does depend on the strength of the product provider. A careful examination should be made on the credentials of the product provider and it is recommended to reduce your risk by not allocating all your retirement savings to the purchase of an annuity.
Post Retirement Lump Sum
Expenses of a discretionary nature that are not essential can be funded by traditional market based retirement planning strategies. The investment strategies adopted will have regard to the level of priority attached to the each retirement planning objective and the time you have to invest your funds before you need draw down upon them.
You will need to be careful in the early years of your retirement not to draw down too quickly on your discretionary funds, especially if the returns you receive in the early years of retirement are not what you planned for. On the other hand, better than expected returns may allow you to do activities which were lower down on the list of your priorities.
Review Your Retirement Plan
Your years in retirement may be as nearly as long as your working life. A retirement plan needs to be flexible to adapt to your changing circumstances, changing investment markets and legislation. A regular review of your personal and financial circumstances will allow you to adjust your strategy and reassess your priorities.
Retirement Income Planning
If you are concerned that you will outlive your retirement savings and you are not comfortable in taking market based risks, purchasing an annuity for your lifestyle essentials costs may be suitable for you. Understanding that your lifestyle essential costs will be met no matter what happens to investment markets, will provide you with peace of mind and the ability to enjoy your retirement.
Disclaimers & Disclosures
Geoff Ivanac is a Sub-Authorised Representative (No. 000309751) of Barsden Private Wealth Pty Ltd ATF The BPW Trust (ABN 41 153 930 799) trading as Barsden Private Wealth. Barsden Private Wealth is a Corporate Authorised Representative No.416315 of BPW Licensee Services Pty Ltd (AFSL 484 198).
The information provided on this website has been provided as general advice only. We have not taken into account any particular person's objectives, financial situation or needs. You should, before acting on this information, consider the appropriateness of this information having regard to your personal objectives, financial situation or needs. We recommend you obtain financial advice specific to your situation before making any financial investment or insurance decision.