Retirement is a time to relax and enjoy the fruits of your labour, but careful planning is essential to ensure your financial security throughout this period (particularly as life expectancy has increased). How to fund retirement – or where your income will come from – is one of the key areas to set up prior to signing off work for the last time.

A crucial aspect of retirement planning is determining where your source of retirement income is from and how you’ll draw down from your retirement fund.

We’ll look at how to use income sources such as superannuation, investment dividends, annuities, property or rental income. We’ll also talk about how the pension fits into your planning and how you can draw down income from your retirement fund in a sustainable way – to keep enjoying a stress-free retirement for as long as possible.

Let’s get into the options that Australians can use to fund their retirement.

Superannuation

Superannuation is the cornerstone of retirement savings in Australia. This compulsory savings system is designed to provide for you throughout your work. It’s helpful to understand how superannuation works , and how it can change year to year to best optimise it for your planning. You can increase or make additional contributions to save for retirement in a tax-effective way. It’s also smart to customise where your super contributions are invested within your super fund. Some people choose to create SMSFs to fully manage their own investments.

Your superannuation can get paid as an account-based pension – where you have a steady income from your superannuation fund. It can also be paid in a lump sum, which you would then manage or put into a different pension product or investment-based income stream.

Transition to Retirement with Part-time Work

Retirement doesn’t necessarily mean an abrupt end to your working life. It can be a gradual transition, and you have the flexibility to tailor your approach to suit your individual needs and financial situation. Many people choose to gradually reduce their work hours or move into part-time work during this phase.

The Transition to Retirement strategy (TTR) allows for this flexible process. This arrangement, available once you reach your preservation age, allows you to access your superannuation savings through a transition to a retirement income stream – while continuing to work on a reduced schedule.

This can be great for those who want to still keep working, or who want to continue to add to your super balance as long as possible. The ATO provides more information on the Transition to Retirement.

Investments & Dividends

Investments like stocks, bonds, and mutual funds form essential components of your financial portfolio.  Your investments can be used for retirement income through earning dividends or by liquidating shares for cash.  It’s ideal to invest in growth assets when you are younger, and then as you reach retirement age you can transition into more defensive investment assets.

Your investment decisions should be based on your overall planning for retirement, as well as your timeline, and what other income you’ll be receiving. Remember, past success is not an indicator of future performance, so getting the right advice for your personal situation is a wise financial decision.

Property or Rental Income

Real estate and rental properties can generate supplemental income to support your retirement plans.  Property can create income streams in a variety of ways, such as through rental income, the sale of an investment property or through utilising the Downsizer Scheme.

Downsizer contributions can be extremely useful to supplement your retirement income in a tax-efficient way. It works by allowing you to contribute up to $300,000 from the sale of your home into your superannuation fund. This contribution doesn’t count towards your contribution cap either!

Another way that retirees utilise property is through a reverse mortgage. This method allows you to release equity from your home to live on. You stay living in your home and don’t have to make repayments, but ultimately the loan will get paid back when you sell, move, or when your estate sells the house after you pass away. This can be quite a risky strategy, so it requires professional advice to navigate well.

Term Deposits or Savings Accounts

Savings accounts can be a great source of income in retirement, particularly if you have unexpected expenses. They can operate as a kind of emergency fund. You want to avoid selling up on stocks that are paying ongoing income as that reduces your income over time – so you should keep some money in cash. While this isn’t like a typical income stream, it’s helpful to include it in your arsenal.

Fixed Term or Lifetime Annuities

Annuities can be a valuable tool for generating a reliable income stream during retirement. They offer several benefits, including:

• Guaranteed income: Provides a predictable income stream for a set period or even a lifetime.

• Increased Centrelink eligibility: Many annuities have concessional treatment under Centrelink rules, potentially boosting your Age Pension or Disability Support Pension entitlements.

• Non-estate asset: Can be passed on to beneficiaries outside of your will, potentially protecting them from inheritance disputes.

However, annuities also have some drawbacks, such as potentially lower returns compared to market investments and limited access to your capital in some cases.

Type of Annuities:

• Fixed-term annuities: Provide a guaranteed income for a set period, with the option to receive your capital back at the end of the term.

• Lifetime annuities: Offer a secure income stream for life, often with the possibility of increasing payments over time.

Annuities can be a good option for retirees seeking a reliable income stream, those wanting to boost their Centrelink payments, or individuals looking to provide income to a beneficiary. However, it’s important to understand the different types of annuities, compare rates from various providers, and consider how an annuity might impact your overall financial plan. It might be useful to chat with a financial adviser to see if annuities align with your goal.

Age Pension

The Age Pension is a government benefit that serves as a critical safety net for numerous retirees, providing up to $1,538.60 every fortnight for couples. According to ASFA, a modest lifestyle can largely be sustained by the Age Pension, especially if you have an additional lump sum of approximately $100,000 in superannuation. This information is particularly encouraging for many Australians approaching retirement age who may not have accumulated significant super savings in their earlier years.

Eligibility to receive social security is dependent on your age, income and assets. If you are eligible for the pension, change your retirement savings goal by subtracting how much you will receive in government support each year. You can also use a retirement calculator to see how much you might need to supplement with the aged pension and how that will affect your expectations for your lifestyle in retirement.

Mature couple with financial documents in home interior

How to Spend Your Retirement Funds

For many retirees, their greatest fear is running out of retirement funds and having to give up their choice over their final years due to a lack of money. To make sure your retirement funds last as long as you need them to, you can adopt a sustainable withdrawal strategy.  There are several strategies available, but some are definitely better than others. Remember, a set-and-forget strategy may not be as effective as an adaptable one.
If you’re worried about your retirement, please reach out to a retirement planner or financial advisor. Getting some advice can vastly reduce the stress and complications associated with figuring out your money in retirement.

Fixed Percentage Withdrawals

Given the federal government’s minimum drawdown requirements, this is often the default strategy for Australians. The minimum super drawdowns go from 4% at age 65, to 5% from 65 to 74 and so on, increasing by 1% every 5 years. For example, if you have $800,000 in savings and withdraw 5%, you’d take out $40,000 annually. This system naturally adjusts your withdrawals to the market, however, you’ll need to monitor your balance as you get older to ensure sustainability.

The 4% Rule

The 4% Rule is the most well-known retirement withdrawal strategy, and it works by withdrawing 4% of your total investments each year while making adjustments for inflation.

There are some drawbacks to the 4% rule: it’s not flexible to changes in market conditions or lifestyle changes, it is based on a specific investment portfolio that isn’t relevant to everyone, it may create a large end-of-life surplus, and minimum withdrawal amounts in Australia are over 4% if you are over 65.

Fixed Dollar Withdrawals

Fixed withdrawals provide a predictable income, and are usually determined by your annual budget. For instance, you might set your annual budget at 67% of your current annual income and stick to it. However, there are some downsides: There is a risk of running out of money if you set your withdrawal amount too high, it doesn’t account for inflation unless you adjust the amount, and you’ll have to re-evaluate as you spend less money in later years.

Retirement Buckets

A bucket strategy usually includes a shorter-term savings account and intermediate and long-term investment buckets. As you spend from your retirement savings account, you can sell your investments or use the earnings from your investments to refill this account. The drawback is that managing this system can take a lot of your time, and you’ll still need to calculate your budget separately.

The Market-Based Approach

A more complicated approach is used as financial advice by advisors to base the retirement withdrawal rate on both the level of stock market risk in the total portfolio and the overall valuation of the markets. In practice, it dictates a higher withdrawal rate—typically, the rate for moderate-risk retirees starts at around 4.4% and can go as high as 5.7%. For a more conservative investor, the rate starts at about 3.9% and goes as high as 5%.

The Custom Approach

Another benefit of customisation is the ability to work with other assets, such as property. Property is not covered in superannuation withdrawal methods and often has a big impact on finances throughout your life. Many Australians use property to finance half of their retirement!

As society and legislation change, a tailored approach can offer more flexibility. For example, the Federal Government announced the minimum retirement age would increase to 70 by 2035, creating new challenges for retirees of the future.

More Guides to Retirement Planning

This article is just one part of what you need to think about with your retirement. We’ve covered if your retirement nest egg will be enough, and how to create a plan to meet your retirement objectives and achieve a comfortable lifestyle on your income from retirement.  We’ve also discussed if paying rent during retirement is ok, or if owning your own home is a must.

Read more of our articles, or reach out to speak to one of our financial advisors. We’d be happy to help you navigate this complex time.