Maximising your Retirement Assets and Income
Joe and Tina's story*
When Joe and Tina first met with us in September 2015, they were both 65 years of age and Joe was about to retire. Joe was a store manager and Tina a stay-at-home mum. They had a total of $400,000 invested in superannuation, all in Joe’s name. They owned their home and had $20,000 in personal assets. They had no other financial assets or debts.
Joe and Tina estimated they’d need a minimum income of $37,000 per year to meet basic living expenses in retirement. However, they wanted a more comfortable retirement and believed they would need approximately $58,000 per year to achieve that.
They also wanted to spend $5,000 per year over the next ten years on travel.
Joe and Tina were eligible to receive some secure income from the Age Pension. This was $28,971[i] per annum based on their then current level of assets.
Over time, they expected their pension entitlement to approach the maximum rate as they drew down on their assets to fund their retirement. However, this was still $3,018 per annum below their basic needs (in today’s dollars).
Joe and Tina’s life expectancies were 19.22 and 22.05 years respectively[ii]. This is an average only – as they were in good health, they could expect to live well past 90. Like many Australians, Joe and Tina feared that they would outlive their savings and were worried they won’t be able to afford their basic expenses once their retirement savings run out. Joe and Tina wanted therefore to find an additional source of secure income to cover the difference between their basic retirement expenses and the maximum rate of Age Pension.
Joe and Tina were also concerned about share market volatility and therefore prefered only a moderate exposure to growth assets (50% in growth assets, 50% in defensive assets).
We recommended that they convert Joe's superannuation into a combination of income streams. This strategy was designed to give Joe and Tina not only their preferred level of income, but also the flexibility and certainty that they desired.
The first income stream was a lifetime annuity. A lifetime annuity is a secure investment that can provide a series of regular payments for the rest of their lives. They invested $56,217 and this provided them with an income of $3,018[iii] per annum. This secure source of income helps them meet their basic living expenses even if they spend the remaining balance of their savings in the future.
The next recommended income stream was a ten-year term annuity, that would have no remaining capital at the end of the term. A term annuity provides regular, known payments for a fixed period of time. This investment was $46,994 and locked in income of $5,000 per year for ten years, allowing Joe and Tina to fund their planned travels.
We also recommended that they establish an account-based pension with the remaining superannuation balance of $296,789. With an account-based pension they were able to choose from a range of investments, and select the level of income they draw, subject to minimum payment requirements. We recommended that they draw $21,011 from their account-based pension in year one.
The account-based pension was invested in a mix of 67% growth and 33% defensive assets to meet Joe and Tina’s preferred overall asset allocation of 50% growth, 50% defensive[iv]. The account-based pension is designed to provide them with an income stream that helps give them the lifestyle they desire until it runs out.
With this strategy, Joe and Tina are matching income from different sources to different expenses. The secure income from the Age Pension and the lifetime annuity provides them with secure income that meets their basic living expenses during their lifetime. The term annuity pays for their planned travels for a set number of years while the account based pension helps them achieve their desired lifestyle until the capital runs out.
The income streams, when totalled, provided $29,029 income for Joe and Tina in the first year of retirement. With their Age Pension payments of $28,971 on top, Joe and Tina had a total income of $58,000 in that first year.
As a result of speaking to us, Joe’s $400,000 superannuation balance was invested so that during the first year of their retirement:
- a $56,217 lifetime annuity gave them $3,018
- a $46,994 10 year term annuity gave them $5,000
- a $296,789 account-based pension gave them $21,011
- they receive $28,971 from the Age Pension[v].
Joe and Tina have:
- A safe and dependable income stream from the lifetime annuity that, in addition to their Age Pension entitlement, can cover basic expenses for the rest of their lives and provide some protection against share market risk.
- An additional amount of income for ten years from the term annuity to pay for holidays.
- Market-linked income from the account-based pension designed to pay for the ‘nice to haves’ and maintain some flexibility.
- Exposure to the share market through the account-based pension.
- Some inflation protection from the Age Pension and annuities.
- Further potential to increase their Age Pension, as the lifetime and term annuities have a reducing asset value under the current Centrelink Assets Test.
[i] Based on Centrelink rates and thresholds as at 20 September 2015. The maximum rate of Age Pension for a couple combined is $33,982 per annum.
[ii] Source: 2010-2012 Life Expectancy Tables from Australian Government Actuary www.aga.gov.au
[iii] Based on applicable Challenger annuity rates for Joe as at 21 September 2015 and assumes no adviser fees. Income is paid monthly indexed to inflation for the term annuity and partially indexed to inflation for the lifetime annuity. Joe and Tina have also chosen not to select the voluntary withdrawal option, but chose to have a withdrawal guarantee of 50% for death where it occurs within the withdrawal period. Challenger annuity rates are subject to change.
[iv] The annuities form part of the defensive portion of the portfolio.
[v] The current amount of Age Pension that a couple in the same situation as Joe and Tina would receive.
* Names have been changed to protect client privacy.
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