Australians are living longer and retiring earlier. Many of us will spend more than a quarter of our lives in retirement.
While that sounds like great news, it's also cause for concern. It comes with the worrying possibility that many of us could outlive our retirement savings.
The comfort you experience in retirement depends on a range of factors. How much superannuation have you accumulated over your working life? Will you be able to access the age pension? Do you hold any assets outside of super?
According to the Association of Superannuation Funds of Australia (ASFA), an individual will need at least $42,893 in savings each year to support a comfortable lifestyle in retirement. For couples, it will be closer to $58,9221.
With the age pension unlikely to support the lifestyle many Australians hope for, it's generally wise to have retirement savings sufficient to provide an income equivalent to around 60 percent of your pre-retirement income.
To understand how much super you'll need in retirement, ask yourself four simple questions:
- What sort of lifestyle do you want in retirement?
- What is that lifestyle likely to cost?
- How long will your retirement savings need to last?
- What is your likely lump sum target?
It's never too soon to start thinking about strategies to maximise your income in retirement. By acting earlier, you have a better chance of achieving and funding the lifestyle you want.
There are ways to make your money last through retirement, including working for longer and making extra contributions to your super. Remember that not all strategies will suit your personal circumstances.
If your retirement nest egg is well short of your needs and expectations, delaying your retirement by working for longer can have its advantages.
Depending on your age, your employer may be able to keep contributing to your super. And the longer your super is invested, the more likely it is it will grow over time.
Contributing to your super from either your pre-tax or after-tax salary can give your super a much-needed boost. And the earlier you start, the better your financial outcomes are likely to be.
By making smaller, regular contributions you will benefit from compound interest – you earn interest on your initial investment, and on the interest you have already earned.
Keep in mind that the government puts limits on the total amount of contributions you can make each financial year before they're taxed at a higher rate.
The Government's Age Pension won't provide the income generations of Australians will need for a comfortable retirement in the future.
If you choose to stay in full-time employment or move to part-time work after reaching your preservation age (55-60 depending on your date of birth), you may be able to build more wealth for retirement by starting a transition to retirement pension.
By continuing to work full time, making salary sacrifice contributions to your super and topping up your reduced salary with income from a transition to retirement pension, you could potentially contribute more to super than you withdraw.
And in most instances your transition to retirement pension will be taxed more favourably than salary and wages.
When you do decide to retire, you need to make sure you are able to replace your wage with other income.
Generally, there are three options for how you can access your super in retirement:
- Withdraw it as a lump sum
- Take it in the form of a retirement income stream
- A combination of both.
Each of these options will have different consequences for the tax you will pay and how long your money will last.
In addition to super, you could receive retirement income from the age pension, an account-based pension, annuities and other income sources like term deposits, shares or property.
The Government's Age Pension has long been an important source of retirement income for many people, but it won't provide the income generations of Australians will need for a comfortable retirement in the future.
Rising life expectancies mean the age pension system is unsustainable, and the government is making it tougher for new retirees to qualify for the age pension.
From July 2017 the qualifying age for the pension will increase by six months every two years. By 2023, the qualifying age will be 67.
The age pension alone is unlikely to set you up for a comfortable retirement, so it's worth considering strategies that might provide regular and reliable additional income in retirement.
Investing your super in an account-based pension rather than taking it as a lump sum could potentially make your retirement savings go further.
Account-based pensions allow you to access your money tax-effectively as a regular income.
You can invest in a range of assets including cash, shares or property, inside or outside of an account-based pension. The difference is that the government provides tax savings on investments when made inside the pension structure.
The capital value of an account-based pension is linked to the performance of the underlying investments, which can impact the level and duration of your savings and the income produced.
Another method of providing an income stream in retirement is through an annuity.
An annuity is an investment that pays a series of regular guaranteed income payments for either a fixed period of time or for life.
There are three main types of annuities:
- Fixed term annuities that pay a regular income for a set number of years
- Life expectancy annuities that pay a regular income fixed for a term based on your life expectancy
- Lifetime annuities that pay a regular income for the remainder of your life.
While annuities are often considered a safe-haven, it's important to understand the potential downsides.
For example, annuities are generally less flexible than account-based pensions as you cannot make lump sum withdrawals.
The fund manager also decides how your money is invested, so you could be foregoing the opportunity to achieve better returns by investing your money elsewhere.
And perhaps most importantly, you need to consider whether it's wise to lock yourself into a long-term annuity when official interest rates are so low.
Just under half of all bank term deposits in Australia are held by over-65s2 who are looking to boost their retirement income.
Generally, these people are attracted to term deposits because they are safe, low-risk investments that can provide income in retirement to help pay living expenses.
But when official interest rates are low or falling, the returns from term deposits are also much lower.
In today's record low interest rate environment, the returns from term deposits are moderate at best, which means less money in the pockets of retirees.
Whether you're retiring tomorrow or planning for the future, you can always start thinking about new ways to boost your retirement income.
Structuring your retirement requires careful planning. There are complex variables to consider, such as increases in the cost of living, market fluctuations and the implications your retirement income streams might have on your tax or income test requirements.