Some Options for John and Karen to generate an income in retirement
When investing to generate an income for retirement, there will be many options to choose from. Different investments will have different conditions, advantages and disadvantages. For example, some can be bought only with your ETP (or superannuation) and others will allow you to invest regardless of how you have saved the lump sum.
Purchasing an annuity or pension is the most common way of setting up an income stream for retirement. Annuities and pensions can be paid for either a set period of time or for the rest of your life.
Some of your options are summarised below. Please note that the examples and case studies are general opinions only, and are not intended as personal financial advice. Before making any investment decision, investors should consult a financial planner to ascertain their individual needs.
Immediate annuities
These products can be bought with your superannuation or with savings unrelated to your super.
If you choose to invest your savings in an immediate annuity, you will be provided with a regular source of income for life or a specified number of years or for your life.
The amount you can receive as the amount and duration of your investment and the current interest rate will determine an immediate annuity. However, you can nominate the frequency of payments. For example, you could choose to have a lump sum paid to you annually, or you could opt to receive smaller sums each month.
Once the contract is set, it can't be altered. This means that immediate annuities are not as flexible as other products. However, they're very secure investments and, for many people, provide significant tax and social security advantages.
Allocated pensions
Allocated pensions can be extremely tax effective. Under current legislation it is possible to structure components of your superannuation so that when it is converted into an allocated pension you pay little or no tax in retirement.
These products can only be bought with your ETP. They provide regular income payments when you retire in exchange for your lump sum.
Allocated pensions allow you to control the frequency and, subject to Government pension limits, the level of payments you receive so you can take as much or as little as you need. Payments last until your money has run out. These investments are available from numerous fund managers. While they may share similarities, there may be some variations. For example, one fund manager may offer a no entry fee structure, while another may charge an entry fee but no exit fee.
What else should you consider?
Whilst examining how you'll finance your retirement is essential, other issues also need to be considered.
The day you retire will herald some major lifestyle changes.
Lifestyle
Retirement could very well be one of the most fulfilling phases in your life. So, what do you hope to achieve when you retire? Perhaps there's a hobby or a course you've always wanted to take -up - the choices are almost endless.
However, keep in mind that, after spending several decades working full time, you could find the transition into retirement a bit of a shock.
You may like to consider part time or voluntary work to ease your self into retirement. Part time work can be an effective way to supplement your retirement income. Voluntary work can help you adjust to a retirement lifestyle by giving structure and purpose to your time without the stresses associated with paid employment.
Estate planning
Sadly, estate planning is all too often overlooked. Many people think making a will is unpleasant, but the consequences of not having an up to date will can be surprisingly serious.
A will allows you to direct how your assets will be distributed after your death and to choose the person(s) who are responsible for protecting your estate and carrying out your wishes. Your estate includes all of your belongings such as your home, car and collectibles.
If you die intestate (without a will), your estate will be distributed according to a government formula. It's almost inevitable that this formula won't produce the result that you would have wanted.
Stop for a moment and consider what would happen if you or your partner were unable to work because of a major trauma, illness or injury? Even worse, what if you or your partner were to pass away? What would happen to your current lifestyle and your retirement plans?
Personal risk insurance such as life, trauma, total and permanent disability and income protection serve as a safety net. If tragedy does strike, the subsequent financial burden will be somewhat eased.
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