3 key steps to ensure you’re taking the appropriate level of retirement income

Category: Australia & News

As you approach retirement, you will have a series of decisions to make in respect of how you intend to draw a sufficient income to support your lifestyle once you stop working. 

A key part of this will involve taking money from your accrued super fund – or funds – both as income and as lump sums.

As you may be aware, in Australia there are government-mandated minimum amounts you can take each year from your super fund once you are in an account-based pension. These are determined by how old you are.

However, at a recent conference of leading Australian investment advisers, it was suggested that retirees are not drawing enough income from their super funds.

Read more about what was said at the conference, and discover three key ways to ensure you’re taking the appropriate amount of income each year. 

Investment advisers call for end to underspending of super funds

The conference in question was the Finology Summit – an annual meeting of investment and other financial professionals considering issues of behavioural finance and investment strategy. 

IFA.com.au, a leading website for financial advisers, reported that there were calls for action to be taken to stop the increasing “underspending” of superannuation.

In fact, there have been previous calls from governments for Australian retirees to spend their superannuation savings but volatile and uncertain economic forecasts have seen many retirees looking to hang on to their money.

Many retirees see the minimum withdrawal levels as the correct amount to take

Currently, retirees under 65 must draw at least 4% of their account balance each year, while those aged between 65 and 74 must take 5%. From the age of 95, retirees must withdraw 14% of their income.

Despite these being minimum amounts, it is apparent that many retirees believe that it’s the correct level of income to take.

Indeed, a Treasury survey in 2021 revealed that a majority of people are simply drawing the minimum income from their accrued super fund each year.

The problem is that only taking a minimum amount can result in you deliberately tailoring your expenditure around those figures.

You have a range of options for drawing income from your super fund

Super regulations will normally allow you to take lump sums, income, or a combination of the two, from your fund.

The choices you make in this regard could affect the amount of tax you pay, so it’s important to plan this carefully. For example, any lump sums you take will immediately stop being treated as super, so you will need to consider the tax implications of them becoming savings. 

You have flexibility around how you can take income from your fund, with annual and monthly options available to choose from. Any undrawn income will remain invested.

You should also bear in mind that you may be able to receive an income from your super while you continue working. You can do this by starting a transition to retirement income stream (TRIS). 

Used effectively, a TRIS could enable you to “phase” your retirement, allowing you to benefit from reducing your working hours without necessarily having to reduce your income.

You may well have other sources of retirement income

As well as your super fund, it’s important not to overlook other sources of income, and ensure you include these in your retirement planning. 

Such sources could include:

  • Savings
  • A share portfolio
  • Other investments
  • Rental income from a property portfolio.

You should also factor in the potential proceeds from the sale of any business you may own, and any assets you may have in the UK if you have spent any time there.

An expert adviser can work with you to ensure you create an income that is as sustainable and as tax-efficient as possible.

3 key factors to ensure you’re drawing the appropriate amount of income

When it comes to the actual amount of income you should be looking for in retirement, there are three key steps you should consider.

1. Have a retirement income plan in place

It’s just as important to plan for your retirement years as it is to plan for accumulating your wealth during your working career.

This becomes ever more important after retirement, as it is possible that you won’t be in receipt of regular earnings in the way you have been during your working life. 

As a result, it’s important to have an effective and robust plan in place to ensure you’re taking the right income and doing so as tax-efficiently as possible. 

2. Make use of cashflow forecasting

Predicting the future is an inexact science that can be fraught with danger. 

However, by using cashflow forecasting, it is possible to obtain the necessary information to allow you to make informed decisions about the income you should be looking to take on a year-by-year basis. 

An effective forecast will take a variety of data into account, including:

  • How your investments have performed
  • Current and projected rates of inflation
  • Income you’ve already taken. 

It can also consider various potential scenarios, both personal and external events, to see how they could affect your future finances, and whether you should be adjusting your plans as a result.

3. Review your arrangements regularly

Once you’ve started drawing income, it’s important to review your plans regularly to ensure you’re still on track and that there is no danger of you running out of money.

We would normally recommend you review your plans annually. A regular review will allow the opportunity to consider any changes in your circumstances that could influence your plans. Such changes could include a deterioration in your health, or any plans you have to sell your current property and move somewhere else.

Get in touch

If you have any queries regarding your financial planning, please get in touch with us. 

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is for information only. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of ATO legislation, which is subject to change.