Aaron Minney

Australians are increasingly relying on income from super and other investments to fund their retirement. While many may turn to the familiarity of shares and term deposits, a new report from Challenger shows that retirees have more options to generate income in retirement than they might think.

Authored by Aaron Minney, Challenger’s Head of Retirement Income Research, the Investing for income whitepaper highlights the many ways retirees can generate income from different asset classes.

“When you’re retired, you need to think differently about generating income compared to when you’re still working or accumulating savings,” Mr Minney said.

“In retirement, income is not really about your investment returns each year. It is the money that you use to fund your lifestyle, and this can have a varying impact on a retiree’s pot of savings.

“As Australians retire, they need their savings to work harder and last longer. With life expectancy increasing, many can look forward to 24 years or more in retirement, so finding the right retirement income solution for individual retirees is critical.

“The government can’t fund everyone in retirement because the number of people in the workforce per retiree is reducing over time. We simply don’t have the capacity to raise taxes to fund a comfortable retirement for everyone.

“And as the cost-of-living bites, this is especially challenging. Half the real value of a retirees’ income is lost after only 14 years if inflation averages 5% a year. While this is a high rate it is well below today’s current inflation spike,” Mr Minney noted.

Retirees fear outliving their savings

The whitepaper looks at different ways to invest for retirement income and emphasises three key retirement concepts that retirees should consider adopting depending on their lifestyle needs and the value of their savings and investments.

“If a retiree spends less than the income generated, their retirement capital grows. If the amount spent equals the income generated, capital is preserved and if the money spent exceeds the income generated then capital declines as it is consumed.

“All three of the ‘grow, ‘preserve’ and ‘spending down’ paths are valid but which one you could use depends on your goals in retirement and the lifestyle you want to maintain and can afford. The chosen path can impact the best investment approach for someone generating income from their investments.

“Super is simply capital saved for retirement while working so it is appropriate that it is ultimately converted back to income.

“Unfortunately, many older Australians choose to draw the minimum income required from their super out of fear of running out of money and uncertainty about the future. In doing so, they might unnecessarily compromise on their lifestyle.

“This is a one-sided strategy that overlooks the potential for properly invested super savings to help increase and extend the longevity of their income.”

The report shows that income generated from a portfolio will vary with different asset allocations, and will depend on both the average return generation, and the variability of that return.

“For example, some defensive assets are sometimes labelled ‘income’ to differentiate them from ‘growth’ assets. However, in a properly constructed portfolio, growth assets are equally important to supporting retirement income over several decades.

This combination of income and growth within an asset class and the potential to draw capital from the investment can be used to generate income that an investor needs,” he added.

For those inexperienced in investment strategy, seeking help and advice from a professional financial planner is often one of the best investments people can make as they enter retirement.

Read the whitepaper.

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