In this, the second article in the Road to Retirement series we tackle the challenges of making your money last as long as you do!

It follows our first article, Reframing Retirement which encouraged you to dream big and design an exciting retirement – but one that’s based upon your realistic needs and means.

Today we explore the key levers of retirement income and how they work together. An understanding of these basics shows how retirement income, when managed well ahead, can meet the challenges of cost of living increases and general economic volatility.

Many people are understandably overwhelmed by the task of calculating whether their savings will result in a comfortable or hand-to-mouth later life. That’s partly to do with the complexity of the multiple rules, as well as the need to project future inflation, compound interest and government pension indexation.

As with most other tough tasks, the best strategy is to reduce your planning into a series of small, achievable steps. Understanding the five levers you can use to create a reliable retirement income stream is the logical starting point.

1. Your superannuation

If you are in your 50s or early 60s you are a direct beneficiary of the compulsory superannuation laws introduced in 1992. This is because you have now had the Super Guarantee paid by your employer for most of your working life.

This money is essentially ‘locked’ until you reach Preservation Age, which means that it has had a long time to compound and increase far beyond the original contributions. Over time, super will start to overtake the Age Pension as the primary source of income for those in the early retirement years. This means it’s really important that your take your super seriously, which means knowing:

• Your balance
• Your likely balance at retirement
• Your current investment settings for your super
• Ways to contribute more (including salary sacrifice, government co-contributions, carry forward rules, bring forward rules and downsizer opportunities)
• The rules associated with Preservation Age, particularly tax implications

2. Home ownership

Currently just over 80% of Australian retirees live in a house they own. Of these, about 85% have no mortgage. This is clearly desirable as paying interest on a mortgage in retirement is a huge drain on disposable income.

Benefits of home ownership are significant. Your housing costs as a proportion of your retirement income are lower and your sense of security and financial wellbeing are most likely much stronger. The equity in your home can often be used to top-up retirement income, either by using the government’s Household Equity Access Scheme (HEAS) or a reverse mortgage.

Until now the home has been considered somewhat ‘sacred’ – with retirees reluctant to access this capital. But this attitude is changing, partly due to the uptake of the HEAS scheme, but also because a higher proportion of people are heading into retirement still carrying a sizeable mortgage. Rather than bequeath their housing wealth in their estate, they are now choosing to use small proportions to amounts of this wealth to improve their retirement lifestyles.

Understand the five key levers of retirement income and make your savings go the distance. Photo: Getty

3. Age Pension entitlements

This is the most common form of retirement income with, according to the Australian Institute of Health and Welfare (AIHW), about 63% of older Australians currently receiving a full or part-Age Pension.

The full Age Pension (including supplements) is paid fortnightly, with singles currently receiving $29,024 per annum and couples (combined) receiving $43,753. The proportion of full Age Pensions is reducing and part-Age Pensions are increasing as people enter retirement with higher super balances, [mainly due to the assets test].

Perhaps the most important feature of the Age Pension is that it is a government-guaranteed safety net, which is indexed to cost of living increases. This means that the vast majority of Australians can rely on at least this income even if they have no other means.

Knowing your likely eligibility as early as possible helps you plan ahead, as does knowing how your super and an Age Pension will combine to deliver a retirement pay cheque. This calculator helps you see your own scenario.

4. Capacity to work or work prospects

As well as ensuring you are socially connected, work delivers many psychological benefits. Remaining work fit (employable) is important so you, rather than someone else, control your work future.

How much you work and for how long is up to you – and doesn’t have to be a forever decision. But an awareness of how work income is treated by Centrelink – in particular the Work Bonus credit will help you make these decisions.

5. Private savings

These are savings such as cash accounts, term deposit accounts, shares or property investments. They can vary greatly from individual to individual, but the main question to ask is whether money invested in this way is being used to maximum advantage. One measure is returns – if you have a lot invested in cash you may find this money is eroded by inflation.

There are also tax concessions for retirees which means that money in super is treated more favourably than investments outside this environment. If your money is in a high-performing Industry SuperFund, your earnings (for balanced funds) over the past financial year are likely to be as high as double that earned on savings accounts.

Using the five levers

At any time in your retirement journey you may be able to combine any– or all – of the above five potential sources of income. Before you retire is the time to understand how each individual lever can contribute – and the likely combinations that will fund your later years.

As we covered in a previous article even after you start to access super through an Account-Based Pension (ABP), if it’s in an Industry SuperFund, your money will continue to generate earnings often much higher than the initial minimum ABP drawdown rate of 5% for retirees aged 65-74.

Will your money last in retirement? is part two of the 8-part Road to Retirement series.

Our next article explains what happens when your turn 60. It’s decision time, so what do you need to know?

Stick with your Industry SuperFund in retirement and your money could go further. Visit compareyourretirement.com today.

This content is produced by The New Daily in partnership with Industry Super Australia.

This information provided in this article is of a general nature only and does not constitute financial or other advice. It is important to consider personal objectives, financial situations or particular needs when making financial decisions.