The Importance of Security of Income In Retirement
Although often painted as an idyllic period at the end of working life, full of golf, travel and sunset walks, retirement can fall short of this vision for many Australians. The risk of not having enough funds to support the lifestyle we desire, depleting our life savings or even of dying too early before it can be enjoyed are uncertainties that retiring Australians must consider.
The best way to safely manage risk, is to avoid it.
This advice is sage if you are considering adrenalin rush experiences, or even when faced with threats to our health, say during a global pandemic, but unfortunately falls short when we consider the financial risks facing us in retirement. Unfortunately, it is not possible to avoid risks such as inflation risk, investment risk and longevity risk.
During our working lives, we became accustomed to receiving a regular income, managing our expenses and living a certain quality of life. After which, as we transition to retirement, often the only regular income Australian’s can rely on (that won’t run out) is the Age Pension which provides a very basic income, and most retirees would prefer to receive a higher income to enjoy a better lifestyle.
For the vast majority of Australians with superannuation savings, their superannuation fund may offer an Account-Based Pension (ABP) at retirement. This is an investment account that allows you to draw down on savings according to a predetermined schedule prescribed by the Government.
For many, these features provide some comfort knowing that there are savings to draw on, however, there are no guarantees that the investment return will keep pace with inflation, and no guarantees that the income will last for your lifetime.
When people retire, their goals can vary. Most seek a regular income that will last for life, and give them access to cash if they need it. Some would also like to leave an inheritance for their family. Given the diversity of retirement goals, using a combination of two products may be better suited for many people.
Using part of their superannuation to purchase an investment linked pension in addition to an ABP is one way for retirees to better manage risk. The investment linked pension allows access to investment choices, but the longevity risk is insured so that retirees will never run out of money as long as they live.
Sound too good to be true? The secret is Longevity Insurance which operates just like any other form of insurance – people pay their premiums and these are pooled. When a claim is made money is taken out of the pool to pay the claim. Just like house or health insurance, some people pay premiums and may never claim. In return you have minimised your risk and have the security of knowing that you have protected your asset if you do need to claim.
In the case of longevity, the risk is living longer than expected and that is when you need to claim. You win by living longer and receiving a guaranteed income for as long as you live!
Suddenly, the risks of not having enough funds to support the lifestyle we desire, or the fear of depleting our life savings too early are managed.
You can better manage your financial risks in retirement by using a combination of retirement products that will provide access to cash but also a secure lifetime income. With the right investment mix you can also broadly keep pace with inflation.
The only risk now, seems that many Australians do not understand that this is an option, or their superannuation fund does not offer a suitable range of products to help achieve this.