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  • Ben Graham-Nellor

Everyone wants to retire but how does retirement income actually work?



Most of us have superannuation, and most of us understand, in general, how it works while we work, but how many of us understand how superannuation works in retirement?


Firstly, and often most unwisely you can access it as a lump sum and withdraw it from super altogether. This is (usually) not a great option as this removes your lump sum from the wonderfully concessional taxed environment that the superannuation provides.


The second option is to arrange a regular payment from your superannuation to your bank account, just like your wage used to be paid.


The most common way to do this would be to convert your ‘accumulation’ superannuation account into an account-based pension. This means that your balance remains invested, exactly the same as your super was if you like, but you begin to draw a regular income from your account. Account based pensions have a mandated minimum draw-down depending on your age. For example, a 65-year-old would draw a minimum 5% of their account each year*.


Money drawn from and earnings within an account-based pension are tax free after the age of 60 so it can be a very enticing option for retirement income.


Other options for retirement income include annuities, where you hand over your money and get a set payment in return. These can be great if you want certainty of payments as the funds are not exposed to the market, or you want a guaranteed income for the rest of your life, the downside is that you often receive a very low return and cannot access lump sums from your savings if you need it (not without penalty anyway).


One of the biggest risks of retirement income is sequencing risk. In accumulation phase, while you are working and contributing to super, downturns in the market, although annoying are not devastating. The market falls, but you continue to have your contributions invested in your super and the assets you buy are cheaper than before. When the market recovers you see the full benefit of your investment. In retirement, you are no longer adding funds to your account, rather, you are drawing them out. This can make losses much harder to earn back, particularly with a fall in the early years of your retirement.


How do we mitigate this risk? Firstly, reassessing your risk profile. How aggressive should you be with your funds? Maybe taking a step back and investing a larger portion in defensive assets would be a good idea. Secondly, is there a mix of account-based pension, market linked with access to your capital, and annuities, certainty of returns and steady income that could be used? Thirdly, there are exciting new retirement products available that can give you the best of both worlds. Market linked for a greater chance of returns with a floor or guarantee that they will not fall past a certain point.


Or maybe a mix of all three.


Most importantly getting good financial advice is crucial to help you decide how much to draw, how to allocate your funds, your access to the age pension and managing your ongoing income and investment needs.


Retirement income doesn’t have to be a minefield, with the right advice you can relax knowing what is coming in and how long it is going to last.


Have a fantastic day.

Ben.


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*Please note at the time of writing the drawdown minimums have been temporarily adjusted due to Covid19.


smart.happy.money is a trading name of BGN Financial Management PTY LTDBen Graham-Nellor is a Sub Authorised Representative (291391) of BGN Financial Management PTY LTD (ABN 45 672 104 196) which is a corporate authorised representative (468796) of Professional Investment Services Pty Ltd (ABN 11 074 608 558) which is the holder of Australian Financial Services License No.234951.


This information has been provided as general advice. We have not considered your financial circumstances, needs or objectives. You should consider the appropriateness of the advice. You should obtain and consider the relevant Product Disclosure Statement (PDS) and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication. 

Professional Investment Services Pty Ltd | ABN 11 074 608 558 | AFSL No. 234951 

C 2020 Smart Happy Money | www.smarthappymoney.com.au

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