Whether you’re planning to retire now or it’s part of your five-year plan, it’s a good idea to start thinking about how you’ll fund your retirement. So, what’s the best way to start planning?
Establish your retirement timeline
Before you get too carried away deciding what you’ll do throughout your retirement, start considering when you’ll be looking to retire. Given that the life expectancy continues to increase, if you’re a 60-year-old planning to retire within the next three years, you could be looking at 20 years living off your retirement funds1. That’s why having a clear idea of when you plan to retire can ensure you save sufficient funds to live comfortably throughout your retirement.
Where will your retirement funds come from?
Once you have a solid timeline in place to work towards, the next step is to work out how you’ll afford to live while you’re retired. This part can actually be a bit more complicated than you might initially think. While there are Government-supported means of income, not everyone is eligible for these, so it’s important to do your research and consider your personal situation.
What are my options to fund my retirement?
While conducting research, you’ll come across a few different options that will allow you to support yourself throughout your retirement1. Here are some of the most common options retirees consider:
- Account-based pension2: This option means you use money you have accumulated in your superannuation fund while working. Essentially, you transfer a lump sum (from your super) into an account-based pension product. You get to decide how often you will receive payments as well as how much you withdraw each year. Plus, you won’t be taxed on investment earnings as you’ll be in the ‘retirement phase’ and your income payments to this account will be tax-free once you reach the age of 60 or over.
- Annuity3: With an annuity, you purchase the product from a life insurance company or super fund (if purchasing using your super funds, you must have reached your preservation age), and receive monthly, quarterly, biannual or annual income payments in return. The more money you put towards purchasing an annuity will mean you get more out of your payments in return. There are also two types of annuities you can choose from – a fixed-term annuity where you receive payments for an agreed upon length of time, and a lifetime annuity where you receive payments for as long as you live.
- Lump sum4: With this option, you can withdraw a lump sum from your super and put this towards funding your retirement. You do have to be careful though, as you must have reached your preservation age to access your super funds, so this wouldn’t be an option for early retirees. If you’re aged 60 or over, this option means you will either pay low or no tax on the lump sum. Plus, you can withdraw several lump sums, depending on how much money you have in your super. However, this option also requires you to be smart with your money and ensure you don’t spend it all in one go.
The end goal
No matter which option you choose to fund your retirement, the important thing is to research every option available. You may find you choose to use a combination of options, or you may come across another option that suits you better. It may also pay to consult a financial advisor to ensure you’re making the best of your financial situation.
General Advice Warning: This information is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information in this article, you should consider the appropriateness of the information provided. In particular, you should seek independent financial advice.
1Moneysmart, 2022, Retirement income, https://moneysmart.gov.au/retirement-income
2MLC, 2022, What is an account-based pension?, https://www.mlc.com.au/personal/retirement/super-and-retirement-rules/what-is-an-account-based-pension
3Michael Lund, 2022, What is an annuity and how does it work?, Canstar, https://www.canstar.com.au/superannuation/annuities-explained/
4Moneysmart, 2022, Super lump sum, https://moneysmart.gov.au/retirement-income/super-lump-sum