Retirement is a time ripe with possibilities, from travel and hobbies to cherished family moments. Yet, understanding diverse income avenues is crucial, as each option presents unique advantages and challenges, making strategic planning essential for a fulfilling financial future.
Retirement is a time to explore new opportunities, whether that’s traveling, taking up new hobbies, or spending more time with family. However, navigating retirement income options requires careful planning. From account-based pensions and transition-to-retirement strategies to lump-sum withdrawals, and annuities, each option comes with its own set of benefits and challenges.
Here’s a comprehensive look at four of these options to help you make informed decisions:
Account-based pension
An account-based pension is a flexible and tax-effective way to utilise your superannuation savings to provide a regular income during retirement. This option becomes available once you reach your preservation age, which is 60. An account-based pension involves converting your super balance into a pension to receive regular payments[i].
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Pros |
Cons |
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Flexibility: You can choose the payment amount and frequency, and have the option to make lump-sum withdrawals. Tax benefits: After age 60, pension payments are tax-free, and investment earnings are also not taxed. Investment control: You have the choice to decide how your remaining balance is invested. |
Longevity risk: There’s a risk of outliving your savings, particularly if withdrawals are not managed carefully. Market risk: The value of your pension is subject to investment performance, which can be volatile Minimum withdrawal: As you age, mandatory minimum withdrawals from your retirement account increase, regardless of your financial needs. |
Transition-to-retirement (TTR)
The transition-to-retirement strategy allows you to access your superannuation while still working, provided you are over 60[ii]. This strategy can be beneficial if you wish to reduce your working hours while maintaining a steady income.
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Pros |
Cons |
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Income supplement: Enables you to top up your income while working less. Tax efficiency: Allows for salary sacrificing which can boost super contributions while reducing tax liabilities. |
Reduced growth: Early access to super can slow down the growth of your retirement savings. Tax on earnings: Earnings within a TTR account are taxed at 15%, similar to an accumulation account. |
Lump sum withdrawal
Opting for a lump sum withdrawal from your superannuation is another possibility, often used for large expenses or debt repayment[iii].
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Pros |
Cons |
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Immediate access: Provides immediate liquidity, which can be used for paying off debts, investing, or large purchases. Flexibility: You have complete control over how you use your funds. |
Depletion risk: Without careful management, there’s a risk of quickly depleting your funds. Investment challenges: The onus is on you to make sound investment decisions to ensure the longevity of your funds. |
Annuities
Annuities provide a guaranteed income stream for a set period or for life. They can be purchased with superannuation savings or personal funds, and can offer peace of mind with a predictable financial outlook[iv].
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Pros |
Cons |
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Stable income: Provides reliable and consistent income regardless of market conditions. Longevity protection: Lifetime annuities ensure income for life, mitigating the risk of outliving your assets. |
Lack of flexibility: Once purchased, annuities do not allow changes to the income amount or access to the capital. Inflation risk: Fixed annuities may not keep pace with inflation unless specifically indexed. |
Making an informed decision
Each retirement income option offers distinct advantages and potential pitfalls. Choosing the right mix depends on your individual circumstances, financial goals, and risk tolerance.
Consulting with a financial advisor is crucial to tailor a retirement strategy that aligns with your lifestyle and financial aspirations. Careful planning will enable you to enjoy the retirement you’ve envisioned, free from financial stress.
If you would like more information on how to these income streams can help fund your retirement, or further assistance with superannuation strategies, contact our office today.
DISCLAIMER: All information on Focus Wealth Advisers is general in nature and does not take into account your personal objectives, financial situation or needs. You should consider your personal circumstances and seek professional advice before making any decisions based on this information.
[i] MoneySmart (2024) Account-based pensions
[ii] ATO (2024) Transition to retirement
