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Factors affecting Retirement Income

Factors which will affect your Income in Retirement

If you want to exercise financial control over your retirement, you need to turn your mind to arithmetic at various stages in the process.

Here are a few general comments that you might want to consider:

It is a truism that managing investments typically involves balancing risk and return - your particular risk profile will have a big impact upon your investment profile, and you need to appreciate that volatility is largely unavoidable. If you want to minimise or reduce volatility, that can be achieved, but it will often come at a cost and impact your investment returns over the long term.
In a free market, there are "no free lunches", unless they're provided by the Government – which means that the taxpayer is subsidising you. However, you need to ensure that you are being tax efficient and the oft forgotten rule that, "If it's too good to be true, it usually is," absolutely applies.
Think very carefully how much liquidity you want to maintain - higher risk normally means higher volatility and you need to be able to have enough cash on hand to see you through the "winter months" or, for example, a corona virus pandemic.
Annuity products can help you sleep at night, but they need to be very carefully considered - your decisions can impact you for decades, or potentially the rest of your life, and
Beware the impact of inflation on purchasing power - even 2% inflation can seriously erode capital over a 20 to 30 year timespan.

To illustrate the impact of investment earning power on retirement income, the tables below show the annual income generated by a $500,000 portfolio earning a return of 4%, 5%, 6% and 7% over 20 year and 30 year period. The annual earnings presume that the capital in the portfolio is reduced to zero at the end of the 20 year and 30 year period. Further, the purchasing power of the annual income at the end period is given in dollars of today, on the presumption that there is an average 2% inflation rate through the period.

ASIC's MoneySmart website provides an indication of the gross returns that might be available from different investment options typically available within a superannuation account. They are as follows: Growth 6.2%; Balanced 5.7%; Conservative 4.2% and Cash 2.9% - but they obviously represent historical returns. In the present low interest rate environment, should it continue, a convincing argument could be made that these are optimistic - the upside is that inflationary expectations are currently well below the trend line.

$500,000 - Annual Income Paid over 20 Years at Various Rates of Return
Investment Earnings
(% per annum)
Inflation Rate
(% per annum)
Annual Payment
Purchasing Power
(end of period)
4
2
$36,791
$24,759
5
2
$40,121
$27,000
6
2
$43,592
$29,336
7
2
$47,196
$31,762
$500,000 - Annual Income Paid over 30 Years at Various Rates of Return
Investment Earnings
(% per annum)
Inflation Rate
(% per annum)
Annual Payment
Purchasing Power
(end of period)
4
2
$28,915
$15,963
5
2
$35,525
$17,957
6
2
$36,324
$20,054
7
2
$40,293
$22,245

In summary, there are a large number of factors that might affect your income over the course of your retirement, including:

  • The composition of your investment portfolio and risk profile, which will be in part driven by your personal situation and age
  • Charges and costs imposed by your superannuation fund or investment manager
  • If you purchase an annuity, whether you want an income stream for a defined period or for your lifetime and whether you want inflation proofing and any reversionary benefits for your spouse, and
  • To what degree you wish to pass on capital or assets through your estate

 

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