The retirement income solution more people should consider

Every day in my job, I speak to Australians who are readying themselves for retirement. While there is generally a sense of excitement regarding the lifestyle changes ahead, the financial side of retirement is usually tinged with some level of anxiety.

Questions I am commonly asked include: How do I know if I have enough savings? How do I generate income from my savings? How long will my savings last?

Annuities can boost retirement security by providing regular income, specialists claim.Credit: afr

By 2025, it is predicted that 150,000 more workers will join the 4.2 million Australians already in retirement. These people should be afforded peace and relaxation in their retirement years, but too often, this isn’t quite the case.

Recent data reveals that one in two retired Australians is uncertain how much they can safely spend each year without outliving their savings. That is a stressful way to enter your retirement, and my experience is that retirees are often willing to trade off some flexibility in their retirement finances for greater certainty.

With this in mind, knowing how to make the most of your super – and the opportunities available to you – is more important than ever.

Most jobs afford workers the security of a regular salary. It therefore makes sense that a regular income in retirement – one that isn’t linked to the whims of the share market – may also create a similar sense of security and peace of mind.

Using an annuity to fund part of your retirement income can assist to diversify your retirement income.

Enter lifetime income products or annuities

Lifetime income products – or annuities – allow retirees to use their super or personal savings to buy a guaranteed income, typically from a super fund or life insurance company.

Annuities offer the option of receiving regular payments for life, regardless of how long a person lives. The payments are guaranteed by the product provider, regardless of the market, inflation and longevity outcomes. This helps greatly in mitigating the worst-case retirement scenarios, the scenarios responsible for the lion’s share of retirement anxiety.

Lifetime income products are particularly relevant today as Australians are living longer than we may have expected 30 or 40 years ago when we began our working lives. In the face of this “longevity risk”, annuities provide a layer of financial security which many retirees are missing.

There are other benefits to consider, too. For example, most annuities are tax-free. Additionally, they can positively impact a retiree’s eligibility for government benefits, as purchasing an annuity reduces a retiree’s assessable asset base.

This can help with the access of important government benefits like the age pension and valuable associated benefits, such as subsidised medical care and utility discounts, which are costs that will continue – or even increase – in retirement.

Pros and cons

The main advantage of annuities is the financial predictability they provide. They reduce the risk associated with investment market fluctuations, high inflation or outliving your retirement savings – the three main risks your retirement savings face in retirement.

A guaranteed income for life also offers greater stability, and peace of mind, enabling retirees to take control of their financial future in a way that is less dependent on investment market returns or interest rate cycles.

However, annuities are not for everyone. And there are some key points when considering this retirement tool, as they are not without trade-offs.

Once the money is locked into an annuity, it generally can’t be withdrawn, which reduces a retiree’s financial flexibility. Further, retirees typically have no say in how their money is invested, and there are also important estate planning considerations. However, most of these concerns can be addressed.

Diversification is key

Not putting all your eggs in one basket is a time-honoured risk management proverb. People generally adhere to it when investing, but less so when devising their retirement income.

Using an annuity to fund part of your retirement income can assist with diversifying your retirement income, providing a new – and stable – layer of income in your retirement.

Obviously, the right course of action for any individual depends entirely on their personal financial situation and their expectations from retirement. Retirement is not a one-size-fits-all concept, nor are the strategies available to help you navigate it.

Partial annuitisation should be thought of as an extra tool or strategy that may complement a retirement income strategy – not replace it. However, with so many Australians approaching retirement with trepidation, they should be on the radar for more people.

Robert Cahill is a financial adviser and expert at UniSuper with more than 18 years’ experience in the provision of personal financial advice.

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.

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