Planning your retirement income

Retirees are often anxious when they retire. Their regular salary ceases and they need to adjust to living off their superannuation, any investments and the Age Pension (if they qualify).

Many retirees try to live off the income their super or investments generate – without eating into their capital.

Up until 2020 we would advise clients to move a large percentage of their superannuation into defensive assets such as bonds to protect the value of part of their capital. This strategy historically generated a reasonable return because bonds pay a fixed income to the investor, and government bonds are less likely to lose their face value because of the reliable income they generate and the safety they provide. But this comes at a cost.

However, 2020 has changed all that.

Bonds will probably generate a zero return until the RBA lifts interest rates above ten basis points (0.10%). After inflation and charges, bonds are likely to return 0%.

Fixed income that generates over 2% per annum is most likely increasing risk. Virgin Airline Bonds in January 2020 were yielding 8% per annum. When companies raise debt through a bond issuance, they pay a higher interest rate if the “market” considers there is a possibility of default. Therefore, the Company has to pay a higher interest rate to attract investors, which in turn makes it difficult for the Company to meet the interest payments, which increases the risk of failure. If you had purchased a $100 Virgin Airline Bond in 2019 the value today is between $0.09c to $0.13c – ouch!

How do you live off the income generated from your investments?

The first rule is assets must be liquid, if you invest in property within super, you need to be aware that you must pay a pension which increases as you grow older. When you reach age 85, the Government requires you to pay 9% of the value of your member balance as a pension each year. If you do not have sufficient cash to pay the pension,  you will be forced you to sell the property to fund these mandatory pension payments. If that had occurred in March 2020, you might have been very disappointed with the sale price.

I want to live off the Dividends and Franking Credits.

Can you? Or more importantly, should you live off the income generated from your investments?

What is the point of living a frugal life in retirement to preserve capital? You have worked all your life to reach this point, and at some time your health will fail, and then you will find it harder and harder to spend your pension.

Most children want their parents to retire and spend their money as they wish and enjoy retirement. To do this comfortably you need to have a plan, a plan that can be adjusted in the same way as you changed your lifestyle during your working life. When you purchased your first home, had children, you adjusted your lifestyle – if your income fell while you were working you cut back on expenditure. If you received a pay rise or a bonus – you spent some on something you wanted, reduced debt or saved.

In retirement it is precisely the same thing. If your investments have performed well – enjoy a new car or a holiday. If the markets have been unkind, reduce your expenditure until they recover.

To do this you need a plan, and that’s where Stonehouse can help. We can provide you with a pension and income forecast. Any forecast must be reviewed annually and adjusted accordingly. It’s budgeting, and it’s nice to talk things through with an experienced adviser – instead of listening to a few mates around the barbecue with a few beers. It might sound good at the time, but is it the right strategy?

Call Stonehouse and request a review – today!

Martin Baker – Partner

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