5 ways you can create reliable income in retirement
Just because you’ve stopped working doesn’t mean the bills have stopped coming. For this reason, it’s essential to have a reliable stream of income when you retire. We’ve taken a look at the five main ways you can create one, and the pros and cons that come with each method.
Account based pension
The most common form of account based pension is a superannuation account that pays out a regular income. Generally you have the freedom to choose your own investment strategy.
Pros
- You have the power to choose your own investment options and pension payment plans.
- Plan is adjustable in response to your changing needs and allows for lump sum withdrawals.
- You generally don’t have to pay tax on pension payments, if you’re over 60.
Cons
- Income isn’t necessarily guaranteed, and if investments don’t perform you could earn less.
Annuity
Annuities are generally available from insurance companies and superannuation funds, and work a little bit differently to an account based pension. Annuities are set up to give you a fixed, regular income for a set period of time (or the rest of your life), depending on the product you choose.
Pros
- Annuities offer the security of a pre-defined income, no matter how the markets are preforming.
- You don’t usually have to pay taxes on annuity payments if you’re over 60.
Cons
- Annuities don’t offer the same amount of flexibility as an account based pension. For example, if you find you need some extra cash has, you don’t have the flexibility to withdraw a lump sum.
- You also won’t get to choose where your money is ultimately invested.
Bonds
Bonds (not of the 007-type) work a little bit like a loan where you are the one loaning money. When you buy a bond, you are effectively lending money to an issuer who in return pays you a regular income until the bond matures at a fixed or floating rate. As the bond matures you get a payout.
Pros
- Bonds have the potential to offer higher returns, depending on the investment you choose.
- Bonds generally have less risk than alternative investments like shares or property.
Cons
- Bonds can be difficult for individual investors to access, particularly in Australia. This is why ere, many investors choose to invest through a managed fund or a super fund.
- While safer, bonds are by no means risk-free, particularly higher-yielding company bonds.
High yield shares
While the risks of investing in the stock market are high, so too are the potential rewards. Many investors who are looking to earn an income after retirement can use the stock market to pick up high-yielding stocks at lower prices, then trade for a profit or reap the dividend payments.
Pros
- When it works, it works really well. Carefully selected shares and canny investment can offer you comparatively high levels of income, with the added bonus of being able to receive franking credits, which are basically like tax credits for tax the company has already paid on your behalf.
Cons
- Share tend to be more volatile than the other investment options.
- There is no hard and fast guarantee that companies will continue to pay dividends.
Property
Residential property has become a very popular choice these days for people looking to turn their money into a secure, income-generating asset that has life for years to come.
Pros
- Property can be a stable investment, allowing you to receive income from rent and capital gains.
Cons
- It’s not 100% without risk. House prices can fall, even after a period of strong gains.
Related links:
5 step guide for building a financial safety net
Laid-back attitude could be bad for superannuation
Should I work part time in retirement?