Setting up a retirement income strategy is a practical step for many Australians entering their next life stage, as it involves turning years of savings into a reliable personal paycheque. Given economic variables like inflation can erode purchasing power, simply having a “nest egg” is often insufficient. For Australians approaching retirement, the goal is not just to preserve a balance within a superannuation account, but to ensure that those savings generate a regular income that can keep pace with the cost of living.
Whether you are relying on the age pension, your superannuation industry fund, private investments, or a combination of multiple income sources, your retirement income strategy should be built to withstand the challenges of an evolving market. This article will analyse common strategies to help establish a retirement income, outlining the risks, opportunities, and strategic best practices.
The Inflation Fight: Protecting Your Purchasing Power
It is one thing to look at a lump sum and feel a sense of achievement. However, it is quite another thing to ensure that this money maintains its value over a twenty- or thirty-year retirement. This concept is the essence of inflation risk. When the cost of basic goods and services, from the weekly grocery shop to health premiums and aged care, rises faster than the yield on your savings, your “real” wealth is technically declining.
For those seeking the best strategy for retirement income, the psychological shift from “accumulating” to “spending” is one of the most difficult hurdles to overcome. Many retirees leave their hard-earned capital in low-interest “at-call” bank accounts, believing this is the most “conservative” path.
However, in a high-inflation environment, this can be a counterproductive income strategy for retirement. For instance, if your account earns 2% while inflation sits at 4%, you are effectively losing 2% of your purchasing power every year. To protect your future, your income strategy should aim for a retirement solution that seeks to outpace the Consumer Price Index (CPI) without exposing yourself to undue volatility.
The Retirement Income Covenant: A New Era for Superannuation
The Australian government has recently focused its attention on how the superannuation industry supports people as they retire. The introduction of the retirement income covenant has been an important part of this shift. This covenant requires trustees of registrable superannuation entities (RSEs) to support people by developing a formal retirement solution that balances three specific objectives: maximising expected income over the long term, managing investment risks, and providing flexible access to lump sums.
Essentially, this means your fund is now required to provide formal guidance, education, and research to help you make informed decisions. It is no longer enough for a fund to simply manage your balance; it must also help you manage the transition into an income stream. This legislative change highlights that retirement planning is not a “set and forget” activity, but an evolving plan that must adapt to your age and life stage.
Understanding Longevity Risk in Your Personal Strategy
One of the greatest challenges to developing an income strategy for retirement is longevity risk, i.e. the risk of outliving your money. As medical technology improves and health outcomes get better, Australians are living longer, meaning your savings may need to stretch for three decades or more.
When preparing your financial situation for this reality, you must decide how to balance your desire to spend money and enjoy your life today with the need to cover your costs in the future. This is where professional advice becomes invaluable. A financial advisor can help you track your spending patterns and create a strategy that accounts for different life phases, from the active “go-go” years to the later “slow-go” years, where aged care and medical insurance might become the primary factors in your budget.
Integrating Alternative Yields: The Role of Pooled Mortgage Funds
A retirement income strategy often benefits from diversification into asset classes that offer regular income with lower correlated market volatility. This is where pooled mortgage funds, such as those managed by Australian Secure Capital Fund (ASCF), may be considered.
At ASCF, we operate as a specialist fund manager. We lend money to short-term borrowers, with each loan secured by a registered mortgage over Australian real property. The income generated from these underlying loans contributes to the fund’s ability to target distributions for investors.
It’s vital to understand that these are targeted rates and not a guarantee. In the investing world, transparency is paramount, and all investing carries risk. However, because ASCF “pools” the investment, your capital is spread across a diverse range of loans rather than being tied to a single property or borrower. This diversification is a key tool used to manage potential investment risks while aiming to provide an income stream for your retirement.
Balancing Private Savings with Government Benefits
An effective retirement income strategy must also consider your eligibility for government benefits. For a large portion of the Australian population, the age pension remains a fundamental support mechanism. Your financial position, including your superannuation and any private investment accounts, will be subject to the Centrelink assets and income tests.
As such, the transition into retirement often involves “layering” different income sources. For example, your strategy might involve:
- A base level of support from the age pension.
- A regular income from a superannuation pension account.
- Additional yield from a managed mortgage fund to help achieve a higher balance of discretionary money.
By preparing in advance, you can structure your savings in a way that is relevant to current government legislation, ensuring you access the maximum support you are eligible for.
Managing Investment Risks and Market Volatility
Retirement income solutions typically involve a trade-off between risk and return. For those approaching retirement, the “sequence of returns” risk is particularly important. If the share market crashes just as you retire and begin taking lump sums, it can significantly deplete your balance and reduce the longevity of your savings.
To mitigate this risk, many retirees adopt a “bucket” strategy. They keep a portion of their money in cash for immediate needs, a portion in diversified investing portfolios with the aim of achieving long-term growth, and a portion in income-focused assets, like pooled mortgage funds, with the aim of generating the income needed for daily life.
Accessing Education and Research
We encourage you to engage with the tools and services available on our website. We believe that education is one of the best ways to protect your future. By reading our Product Disclosure Statement (PDS) and Target Market Determinations (TMD), you can become aware of how our funds operate and the specific circumstances in which they might be relevant to your retirement planning. Additionally, you can access our tools to help you Learn How To Invest, Request an Investor Pack, or Calculate Your Potential Returns.
Tailoring Your Plan to Your Life Stage
As you move through different age groups, your retirement income strategy should not remain static. What was the best strategy for retirement income at age 65 might not still be the most relevant strategy at age 85. For example:
- Earlier Stages of Retirement: You may be more focused on travel and lifestyle, requiring more flexible access to lump sums.
- Later Stages of Retirement: You might prioritise aged care planning, medical insurance, and ensuring your savings can cover the costs of personal care.
An important part of your membership with any financial organisation should be the ability to adjust your investment as your circumstances change. ASCF offers varying investment terms, ranging from 3 months to 24 months, allowing for a level of flexible access that can be beneficial for retirees who need to remain agile.
Taking Control of Your Financial Future
The “inflation fight” is real, but it is a battle that can be managed with the right tools and guidance. By developing a retirement income strategy that accounts for longevity risk, utilises the retirement income covenant frameworks, and explores diverse income sources, you can work towards a more stable financial situation.
At ASCF, we are committed to providing the education and support needed to help you achieve your goals. We invite you to read our website and decide if our income-focused investment options are the right fit for your personal journey.
Retirement is a new beginning. By being aware of the risks, seeking professional advice, and making informed decisions, you can be better positioned to protect your purchasing power and look forward to the future with a clear, defined plan.
For more information on this topic, see our follow-up article Selecting & Balancing Your Income Streams in Retirement.
Interested in learning more? Request an Investor Pack or contact one of our team members today.
Disclaimer:
This website and the information contained in it have been issued by Australian Secure Capital Fund Ltd ACN 613 497 635 AFSL and ACL number 491201 (ASCF).
ASCF is the responsible entity for the ASCF Premium Capital Fund ARSN 637 973 409, the ASCF Select Income Fund ARSN 616 367 410 and the ASCF High Yield Fund ARSN 616 367 330 (each a ‘Fund’ and collectively the ‘Funds’).
As with all investments, each Fund is subject to risks which are set out in the Product Disclosure Statement (PDS). There is a risk that you may lose some or all of your capital and/or a reduction or cessation of distributions. An investment in a Fund is not a bank deposit.
The performance of the Funds, the repayment of capital or any particular rate of return is not guaranteed, and unless expressly stated, performance information contained on this website is not intended to constitute forecasting of future performance. Any information about returns should be considered only as part of a balanced review of the features, benefits and risks associated with an investment in the Funds.
This website contains general information only and should not be considered as giving financial product advice or any recommendation by ASCF. It does not purport to be complete, nor does it take into account your investment objectives, financial situation or needs. Prospective investors should consider those matters, read the PDS & Target Market Determinations (TMDs) for the Funds in their entirety and obtain independent expert advice before making an investment decision.
