Income Layering in Retirement

The power of income layering in retirement

One of the biggest fears for retirees is running out of money during retirement and the impact this may have on their quality of life. With this in mind, many retirees only draw down the minimum of their account-based pension and lack the confidence to spend their retirement savings. They later regret being overly frugal in their early years of retirement. This is called ‘Regret Risk’.

At Generation Life, we understand that everyone's retirement plan will be different, because everyone's objectives, preferences and circumstances are different. A critical part of all retirement plans should be maximising a combination of retirement income from various different sources. This is what we call income layering.

Focus on income streams, not only balances

A retirement plan that focuses on income streams and not only balances can help boost retirement income and provide Australians with more confidence to spend.

Income layering addresses both immediate and future income needs. By adding one or more income streams to a retirement plan, retirees can use these multiple income streams for both their essential spending needs and to help them save for big-ticket items they’ve been dreaming of.

Prioritising what matters most in retirement, and having the guidance of a financial adviser, can help counter Regret Risk.

Key considerations ahead of retirement when it comes to income layering

Account-based pension

An account-based pension is a flexible income stream from your superannuation, offering a wide investment choice, access to capital for a one-off large expenditure and the ability to vary income. Earnings are exempt from tax and any withdrawals are tax free for those above 60 years old.

It is however important to note that an account-based pension can run out and there is no guarantee of a regular income for life. This risk may make retirees cautious about spending their retirement savings.

When should I apply for the Age Pension?

It's important not to delay your application for the Age Pension. Australians on average apply for the Age Pension just over 2 years after they become eligible. These delays are estimated to be costing single retirees an average of $37,000 in Age Pension entitlements, while couples are estimated to lose close to $60,000.¹

Qualifying for the Age Pension can represent significant savings for retirees including reduction in local council rates, reduced vehicle registrations costs and access to cheaper medicines under the pharmaceuticals benefits scheme.

Lifetime income streams - creating an income guaranteed for life

Lifetime income streams (sometimes referred to as annuities) can provide a regular income that’s guaranteed for life and can enhance access to the Age Pension. They can complement account-based pensions to address longevity risks. Retirees can allocate a portion of their superannuation to purchase a lifetime income stream. However, despite their immense value, only 15% of all Australians understand lifetime income streams well.²

Modern lifetime income streams are no longer fixed income products like they were before legislation changes in 2017. Lifetime income stream providers were granted freedoms to innovate and adapt their offerings. Regulation enabled income to be linked to investments, delivering greater flexibility, versatility, and earlier returns on investment, and therefore long-term financial security for retired Australians.

Generation Life’s investment-linked lifetime annuities is one such example of this new breed of retirement income stream where annual income is linked to the performance of an investor’s chosen investment option(s). This ensures retirees have a regular income with the potential to grow in excess of inflation over the course of their retirement.

Research has shown that incorporating a lifetime income stream into retirement can create a positive psychological impact.³ They are proven to transition retirees from fear to confidence, leaving them safe in the knowledge that they can spend, and achieve their dream golden years without running out of money.

Planning for your funeral can ease the burden for those you leave behind

There’s no easy way to contemplate a funeral, but solutions such as Generation Life’s FuneralBond can make that day a little easier for retirees and their loved ones.

Funeral bonds are a simple and tax-effective way to help meet future funeral costs. Saving for funeral costs is a practical and thoughtful gesture that can ease financial stress on those left behind during their time of grief.

A funeral bond can be used as part of a prepaid funeral arrangement and provide the potential to improve pension benefits during your lifetime or reduce aged care costs.

Sources:

1. The most expensive mistake retirees can make, SuperEd, published 2015 https://supered.com.au/news/the-most-expensive-mistake-retirees-can-make/, accessed 4 July 2024
2. Generation Life Not Tomorrow’s Problem Guide, published October 2024 3.
3. Investments and Wealth Monitor; ‘Understanding Underspending in Retirement: The Decumulation Paradox Reexamined’, Todd Taylor, FSA, and Kelli Faust, FSA, MAAA, Nov 2023, https://publications.investmentsandwealth.org/iwmonitor/november_december_2023/MobilePagedArticle, accessed 13 November 2024

Disclaimer

Generation Life Limited AFSL 225408 ABN 68 092 843 902 (Generation Life) is the product issuer. The information is general in nature and does not consider the investment objectives, financial situation or needs of any person. Generation Life excludes, to the maximum extent permitted by law, any liability (including negligence) that might arise from this information or any reliance on it. Past performance is not an indication of future performance. The product's Product Disclosure Statement (PDS) and Target Market Determination are available at http://genlife.com.au and should be considered in deciding whether to acquire, hold or dispose of the product. Other than in relation to Generation Life’s product, only factual information is provided and is not intended to imply any recommendation or opinion about superannuation products or superannuation investment.