With interest rates at all-time lows and an outlook of no change in sight, creating a reliable income in retirement can be challenging. With the cash rate at just 2% since June 2015, Australian interest rates are lower than ever before. And according most economic experts, there’s little prospect of rates lifting before the end of 2016 at the very earliest.
That’s a problem for retirees looking for a secure and reliable income in retirement, without putting their money at risk. Tere are five options to consider:
Account Based Pension: An account based pension is a superannuation account that pays a regular income, with the freedom to choose your own investment strategy.
You can choose between investment options and set your own pension payment amount (within government rules). You can also adjust your pension payment in response to your changing needs and your account’s investment performance. You can even make lump sum withdrawals when you need them (a limit may apply). And if you’re 60 or over, you won't have to pay tax on your pension payments.
Your income isn't guaranteed, unless you have selected a capital guaranteed investments— so if your investments don’t perform, you could earn less than you'd planned.
Bonds: A bond works a little bit like a loan. When you buy a bond, you are effectively lending money to the issuer — usually a government or a semi-government corporation or a company. In return, they generally pay you a regular income until the bond matures, at either a fixed or a floating rate. When the bond matures, you get a payout at the bond’s face value.
Depending on the investment you choose, a bond can offer a higher level of income than cash, with potentially less risk than shares or property. Note that bonds are not risk free, particularly higher-yielding company bonds.
Residential Property: is a very popular choice for those looking for a secure, income-generating asset.
Property offers the potential for rental income today and capital gains in the future. The housing market in the past has provided a rewarding investment for many.
Rising property values have driven rental yields to record lows in many parts of Australia, with the national average yield falling to just 3.3%. Remember too that house prices have fallen can do so again.
Equities: Recent market data showed that 20 of Australia’s largest companies offered dividend yields of 5% or more, covering sectors as diverse as banking, resources, infrastructure, telecommunications and more. For those looking to earn an income, recent market falls could offer the opportunity to pick up high-yielding stocks at lower prices.
Carefully selected equities can offer comparatively high levels of income, with the added bonus of franking credits — which are tax credits for tax the company has already paid on your behalf.
Unfortunately, higher returns involve more risk, and equities tend to be more volatile than some other options. Regular dividend income can help to offset the impact of any future share price falls, there is also no guarantee that a company will continue to pay dividends at the same rate.
Annuity: Available from insurance companies and superannuation funds, annuities give you a fixed, regular income for a set period of time or the rest of your life, depending on the product that you chose.
You enjoy the security of a pre-defined income, no matter how markets perform. And you generally won’t need to pay tax on your annuity income after you turn 60. The biggest drawback is that you don't have the flexibility to withdraw a lump sum if you need extra cash, and you won’t get to choose where your money is invested.
Unsure of what to Do?
Not sure which is best? The good news is that you don't have stick to just one. As financial adviser scan help you build a portfolio of investments both inside and outside super, with the right mix for your individual income needs and preferred level of risk. That could help you avoid the greatest risk of all — running out of money in retirement.
Call us today to make an appointment 1300 861 143.