How Do Retirement Income Options Compare?

Retirement is a time of many options and possibilities. There’s time to take more trips, finish long-pending personal projects, or provide help to deserving organizations.

When it comes to financing your new life without a job, you too have a lot of options. A retirement income option refers to the various ways you can draw income from your retirement savings after you stop working.

 

Photo by RDNE Stock project

 

Determining Your Options for Regular Income Stream When You Retire

Retirement income options help ensure you have a steady stream of pay during retirement. Here are four alternatives to think about.

Account-Based Pension

Using your superannuation to fund an account-based pension (ABP) is a popular way to receive retirement income. Subject to the minimum pension criteria specified by the government, the amount you get is determined by the balance in your account and the drawdown rate you select.

A few things to think about:

• Tax Benefits: Unless you have an untaxed portion in your super, investment earnings, capital gains, and withdrawals are tax-free.
• Payment Flexibility: Most super plans let you change the amount and frequency of your payments, and if necessary, you can even take out a partial or complete lump sum withdrawal. However, this is subject to pension minimums. It is also possible for you to go back to work and keep getting your pension.
• Longevity and Market Risks: If you make a lot of withdrawals or receive bad returns on your investments, you may outlast the amount in your account.

Transition to Retirement

If you are 60 years of age or older and still working, you may access a portion of your superannuation through a transition to retirement (TTR) strategy (subject to existing regulations). A few things to think about

• Adaptable Work Schedules: You can work less hours and use your superannuation to augment your income.
• Pension Rate Caps – There is a minimum annual pension rate, much like with an ABP. A limit annual withdrawal of 10% of the money in your TTR account is also applicable.
• Diminished Retirement Savings – If you take withdrawals from your superannuation while you are still employed, the growth of your retirement savings may be slower.

Read: 8 Common Retirement Mistakes and How to Avoid Them

Annuities

A financial contract called an annuity offers guaranteed income for a predetermined amount of time or for the remainder of your life. Annuities come in a variety of forms, such as fixed, variable, and index annuities. With your superannuation, you can buy lifetime income streams or annuities. A few things to think about

• Stable Income: Offers a steady stream of income that can reassure you about your financial security and last as long as you live.
• Lack of Flexibility: After you buy an annuity, the terms are usually set, and you are unable to change the amount of income. Withdrawals of capital are restricted, and in certain cases, there is no access to capital at all.
• Inflation Risk: Unless expressly indexed to inflation, fixed, non-inflation-linked annuities may not keep up with inflation.

Innovative Retirement Income Stream

A more recent line of products offers an Innovative Retirement Income Stream (IRIS). These were implemented following modifications to rules intended to increase retirement income certainty by providing a pension that would never run out of money.

A few things to think about:

• Age Pension Benefits: Until the age of 84, when it is lowered, Centrelink only includes 60% of pension payments as assessable income and only 60% of the product’s purchase price as an assessable asset.
• Certainty: A steady stream of guaranteed income is provided by certain IRIS products, offering a sense of financial certainty.
• No minimum requirements: IRIS items only need to be paid for once a year, rather than a certain sum each year.
• Complexity: The features of different IRIS products vary greatly from one another and may have intricate terms or conditions.

 

Next Actions:

What impact will these various options have on your retirement income? How well do they meet your personal needs? Our financial advisor can guide you through these options and help you create a strategy that works best for you.

Contact us so we can assist you in creating a strategy to finance the retirement you’ve so diligently pursued.

 

comments powered by Disqus