Funding the lifestyle you want to lead

Superannuation, or ‘super’, can take a long time to build, especially when you are trying to put as much into your super to best achieve your ideal retirement.

There are many different avenues you can take when choosing an option for funding your life after retirement, but you need to make sure you choose an option that fits your circumstances and assists in providing some return to keep your superannuation growing whilst you use it, to avoid running out of money later on.

Seeking advice

The legislation around super can be very tricky to understand and navigate, and can also incur serious consequences if not adhered to appropriately.

Jennifer Langton, Specialist Advice Manager for Aware Super, says it is important to seek advice over one of the most important financial decisions you can make in your lifetime.

Ms Langton gives an example, saying, “Once you roll super into a pension and start taking income from that, then you are reducing that balance over time and it is subject to market fluctuation. So you run the risk of running out of superannuation if you don’t invest it in a way that enables you to achieve some growth.”

It’s important to remember that under normal circumstances you can only touch your super once you reach your “preservation age”, which is currently between 55-60 years of age depending on when you were born, and there are laws around how you take out your superannuation.

Funding options

When the time comes that you need to access your super to pay for your day-to-day living expenses you’ll need to meet a “condition of release” before your funds will be made available. You need to contact your super company to apply for a condition of release.

There are a number of different options for funding your retirement lifestyle:

◆ Account based pension Transferring all or part of your super into an account based pension enables you to start receiving regular income payments. There is a minimum amount you need to withdraw each year based on your age and the balance of the account. The longevity of your account depends on how your account is invested, how much income you draw and how markets perform over time.

◆ Super lump sum Once reaching your ‘preservation age’, you may be able to withdraw all or some of your super as a lump sum, also known as cash, and place it in your bank account. If you are under 60, you will need to pay tax on lump sums over $205,000, withdrawals after age 60 are tax free. What you do with your super lump sum after you withdraw it may affect your eligibility for age pension. Additionally, if you take a super lump sum and spend a large amount of it, it leaves less super to last during your life.

◆ Annuities Investing a lump sum of your money into an annuity, with either a super fund or life insurance company, that will pay you a regular income for a chosen duration or for life. Your income payments are guaranteed, no matter the market performance or interest rate changes, but you may not have the ability to withdraw more money if you need it.

◆ Term deposit You invest a lump sum of money for a fixed period of time into a fixed interest rate with a financial institution such as a bank. Generally, the money only becomes available to withdraw

after the agreed period of time the term deposit runs for is finished. You may have to pay a penalty or fee if you wish to make an early withdrawal before the agreed term. ◆ Pension and other

Government assistance The Government provides a range of funding assistance to older people in the form of pensions and subsidies. The age pension provides financial support, plus a range of concessions and subsidies for older Australians. Your eligibility for age pension payments is based on financial thresholds. If your assets and income are above the published thresholds, you may be able to receive a part pension. Other concessions and subsidies you may be eligible for include the SeniorsCard, Commonwealth Health Card and electricity, water and gas rebates.

◆ Discretionary income After you have paid your taxes, basic living costs and bills, the extra amount of money left over is considered discretionary income. This income should only be used on the finer things in life after you have bought essential items. Discretionary income can be used on any activities or for unexpected expenses. ◆ Investment bonds An investment bond is a debt, which you invest in and it provides a regular payment of interest for a set period of time. At the end of the bond period, you receive the main investment back. Think of it as you are lending money to a company or Government, who pays for interest on the bond, and then returns the investment you made back after the set period of time finishes. An investment bond is not a very flexible agreement. These are just some of the options available to you to fund your lifestyle whilst you are retired and there may be others that are more suited to your specific circumstances.

Taking risks

Engaging a financial advisor can be beneficial in finding the right investment products and mix of investments or funding options for your circumstances. They can make sure you have enough opportunity for growth in your retirement wealth and help you understand how your superannuation system works once you retire. Expert knowledge around superannuation and investment risk and return is key.

Ms Langton says some people retire and put everything in cash, because they consider that cash is ‘safe’, but it is actually unlikely to sustain you through your lifetime because it doesn’t have the opportunity to grow or increase in value to keep up with inflation and the cost of living over time.

“The reality is, the more risk you take, the more opportunity for growth but there is also more opportunity for loss. There is a sweet point where everybody is comfortable and a good financial advisor will have a robust discussion with you about risk and return.”

She adds that based on what works best for you and your goals, your portfolio will then be invested into a diversified range of assets to ensure you have a mix of conservative, capital stable assets, such as cash and bonds and growth assets, like Australian and international shares and property.

When investing money it’s important to be aware that the markets fluctuate often, so moving everything to cash after a blip in the market, such as the COVID-19 pandemic, is a very rash decision.

It’s important to remember that once you make a decision on how you want to fund yourself during retirement, it is difficult to change the choice you have made without financial advisor assistance.

For example, if you decide to take out a lump sum out of your super and put it into another investment, once this is done there are not a lot of other avenues you can take if you change your mind. Once you take money out of the superannuation environment, there are limited opportunities for getting money back into super.

“Some of these decisions once made cannot be undone.”

“The more risk you take, the more opportunity for growth but there is also more opportunity for loss.”

Disclaimer: The information in this article is general in nature and does not constitute legal or financial advice. Readers should seek their own personal legal and financial advice from a suitably qualified practitioner.