27 November 2009
Starting an income stream: what`s your game plan?
The strategy: To start an income stream from my super fund when I retire. Starting an income stream requires prior preparation to maximise the benefits available to you. Don’t leave it to the last minute. You should start the process for your successful transition from super to pension phase well before retirement. Here’s what to consider:
Contributions
You’ll need to make all your contributions before you switch your super to pension phase as you cannot make contributions to your income stream once it’s started. If you`re an employee, you`ll need to check your employer`s final payment has been made. If you`re making a tax-deductible contribution yourself, you`ll need to complete the Tax Office`s "deduction for personal super contributions" form, or you could find you`re ineligible to claim the deduction.
If you have several super accounts, it can be a good idea to consolidate them into one super account to save on account and investment management fees and charges. The best time to do this is after all your contributions have gone in and your fund has been notified of any personal deductible contributions.
Income withdrawal rate
Most people have three major concerns about retirement. These are:
- The need to estimate a predictable and effective withdrawal rate from invested assets to secure a comfortable retirement income for life,
- The impact of inflation on retirement standard of living, and
- The possibility of extended market decline impacting invested assets when earned income has stopped.
Start by making a budget detailing your normal monthly expenditures. Being aware of the cost of your current standard of living lets you plan realistically for the cost of your lifestyle in retirement (generally 75% of your current standard of living).
Decide how much income you want from your income stream and whether you want to receive regular monthly payments, a one-off annual payment, or ad hoc payments as needed. Consider these options in light of how long you want your income stream to last, bearing in mind that the Australian Life Tables for 2000-2002 estimate the average life expectancy of those aged 50 to be 32+ years, those aged 60 to be 23+ years, those aged 70 to be 15+ years, and those aged 80 to be 9+ years. Legal minimum pension drawdowns also apply to your income stream each financial year.
Investment Strategy
Those looking to retire generally become more conservative investors, more concerned about protecting existing savings than in taking higher amounts of risk. However the average person can expect to have 30-40 years in retirement, with women generally living longer than men. Any investment strategy you choose should take into account a time horizon of this length.
Remember:
An adequate retirement lump sum
+ A realistic withdrawal rate from your income stream
+ A healthy allocation to equity equity asset classes
A reasonable probability of a successful and secure retirement standard of living
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