As you approach retirement, it’s probably a good idea to think about how you might fund retirement!

The thought of giving up work-related income for the next 30 years can be daunting, which is why it’s important to prepare for retirement and understand where your retirement income will come from.

How will you fund retirement? What retirement income streams do you have available to you?

Let’s explore the various types of income streams and the key factors in selecting the most suitable ones to fund your retirement.

If you’d rather watch than read, this video also covers the topic:

What are Retirement Income Streams?

Retirement income streams are generally defined as regular payments made into your personal bank account to be used to cover living expenses.

You might rely solely on one retirement income stream, or you may have multiple retirement income streams throughout retirement.

Either way, having regular, steady and predictable income can give you more confidence in your retirement plan and allow you to spend more time enjoying retirement.

So, which type of retirement income stream is most suited to you?

Related article: How Much Super Is Enough to Retire?

Types of Retirement Income Streams

There are several types of retirement income streams available to you. Understanding how each one works and how it might fit in with your overall retirement plan will provide you with greater control over your retirement.

I’m going to take you through the most common types of retirement income streams and then discuss other sources of income that might help you fund your retirement.

1. Account-Based Pensions

An account-based pension is an income stream commenced using your superannuation accumulation balance. Upon retirement, you transfer your accumulation balance into an account based pension, which then allows you to nominate how much income you would like to receive, subject to a minimum annual amount.

The advantages of account based pensions, include:

• Flexibility of Income – You can choose how much income you would like to receive, the regularity of payments, make one-off withdrawals and change the income at any time to meet your needs.
• Choice of Investments – You choose how your account-based pension balance is invested, based on your desired investment return and tolerance for risk.
• Payment on Death – Should you pass away, the remaining balance of your account based pension is paid to your beneficiaries.

The disadvantages of account based pensions, include:

• No Guarantee – An account-based pension does not guarantee an income for the remainder of your life. The longevity of an account based pension is determined by your level of drawdowns and the investment returns within the account.

To be eligible to start an account based pension, you generally need to be at least age 60 and have satisfied the superannuation definition of retirement, or simply attained age 65.

2. Transition to Retirement (TTR) Income Streams

A transition to retirement (TTR) income stream is a retirement income stream you can start with your superannuation balance while you are still working, provided you have reached age 60.

A TTR pension allows you to receive an income of between 4% and 10% of your account balance each financial year.

The advantages of a TTR income stream include:

• Access to Super While Working – Accessing super while working allows you to have more income, reduce working hours in the lead-up to retirement, use the extra income to reduce debt or tax, or a combination of all.
• Some Flexibility in Income – Ability to choose how much income you would like each year, subject to the minimum and maximum thresholds.
• Payment on Death – Should you pass away, the remaining balance of your account based pension is paid to your beneficiaries.

The disadvantages of TTR income streams, include:

• Accessing Super Before Retirement – By accessing your super before retirement, you are reducing your retirement savings, leaving you with less at your eventual retirement.
• No Lump Sums – Unlike an account-based pension where you can withdraw up to the full balance at any time, a TTR pension limits your withdrawals to 10% of the balance in any one financial year.

To be eligible to start a TTR Pension, you simply need to have attained age 60 (superannuation preservation age). However, if you are part of a defined benefit superannuation scheme (usually associated with government/semi-government organisations), a TTR pension might not be possible or worthwhile.

3. Annuities

An annuity is a guaranteed retirement income stream provided in exchange for a lump sum capital investment.

The two main types of annuities are fixed-term annuities and lifetime annuities.

A fixed-term annuity provides a guaranteed income for a predetermined time frame in exchange for a lump sum amount.

A lifetime annuity provides a guaranteed income until you pass away, regardless of how long you live, in exchange for a lump sum amount.

The advantages of annuities include:

• Certainty of Income – you can be confident of how much in regular income you will receive and for how long – making planning your retirement much easier.
• Payment on Death – Many annuities provide at least some lump sum payment to your estate if you pass away prior to the maturity date or your statistical life expectancy.
• No Need to Worry – A downturn in the economy or investment markets will not impact the amount or reliability of your income payments.

The disadvantages of annuities include:

• No Access to Capital – Annuities are generally designed to provide you with a guaranteed income stream and therefore ad-hoc lump sum withdrawals are not available.
• Lower Returns – Annuities are considered a conservative type of investment and likely to provide lower effective long-term investment returns compared to more growth-oriented investments such as shares and property.

Annuities as a retirement income stream can provide a high degree of certainty; however, you need to be comfortable with the limited flexibility and no access to capital.

4. Centrelink Age Pension

To be eligible for Age Pension payments, you need to be at least 67 years of age and disclose your personal and financial circumstances. The amount of fortnightly payments you receive, if any, will then be based on your level of income and assets.

For some of you, the Age Pension will form the majority of your income throughout retirement. For others it will be a supplement to other sources of income such as a superannuation pension or maybe rental income. And for some of you, you might never be eligible for Age Pension payments due to having too much in assets, or might not be eligible for any payments until later in retirement, as your superannuation and investment balances decline.

5. Defined Benefit Pensions

A defined benefit pension is a retirement income stream usually reserved for employees of government or semi-government organisations who were members of a defined benefit superannuation scheme.

Similar to an annuity, a defined benefit pension provides a guaranteed indexed income for life, but no access to capital. Therefore, they provide a high degree of certainty but with no flexibility or ability to make lump sum withdrawals.

Check your superannuation statement or speak with your superannuation fund to see if you are part of a defined benefit superannuation scheme.

6. Personal Savings and Investments

Apart from the types of retirement income streams outlined above, other types of income that can help cover expenses throughout retirement include:

• Bank/Term Deposit Interest – Generally lower returns compared to other investments, but provide access to funds, guaranteed capital stability and predictable returns.
• Share Dividends – Income from share holdings can assist in funding retirement and may also be tax-effective. However, share dividends are neither guaranteed nor consistent.
• Investment Property Rent – Rental income from a property can be a good source of regular and predictable income throughout retirement. However, you should consider the expenses associated with the property that can detract from the return and the risk of the property being untenanted.

One thing to be mindful of in relation to personally owned assets, is that all income and realised capital gains earned will be assessed for tax in your personal name; whereas superannuation owned assets will generally provide tax-free retirement income and earnings.

Factors to Consider When Choosing a Retirement Income Stream

There’s a lot to think about when choosing a suitable retirement income stream to help fund your retirement. In fact, it’s likely you’ll have more than one.

In an attempt to help you decide on how your retirement needs will be funded, here are some factors to consider.

• Financial goals and retirement lifestyle – do you like flexibility, the ability to meet capital expenses and take more control over your retirement savings; or would you prefer to have peace-of-mind knowing that you have a guaranteed income for life?
• Risk tolerance and investment preferences – are you risk averse and prefer certainty with minimal surprises over the alternative of higher returns yet more potential variances in your retirement outcome?
• Tax implications – Have you considered the tax-effectiveness of your retirement investments and the impact any taxes will have on your retirement outcome?

At the end of the day, the sooner you begin preparing for retirement, the more likely you can live the retirement lifestyle that you envisage.

When we work with clients in helping them prepare for retirement, we consider their objectives first and foremost and the effect risk and return has in meeting their retirement income needs. We then determine the most appropriate strategy to meet their goals, while ensuring they only take on as much risk as necessary to meet them.

At Toro Wealth, specialises solely in helping Australians aged 55 and over optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.