Annuities can help provide certainty in retirement
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More people are finding that living costs have added pressure and stress to their retirement.
High inflation has a flow-on effect on all our expenses, and more people are finding that they need to return to budgeting and tracking expenses.
For many retirees, the thought of longevity can cause anxiety, and they worry if they will outlive their funds. There are many ways to approach retirement funding, and what is suitable for one person may not be appropriate for another. It will vary based on your circumstances.
A welcoming relief for some retirees is that interest rates have increased. Before this year, the last interest rate increase was in November 2010. Low interest rates have benefited mortgage holders, but some retirees rely on interest rates for income.
Combining pensions with annuities
The most common form of income in retirement is an account-based pension which is usually subject to market movement and does not have guaranteed pension payments.
The longevity of an account-based pension also depends on your pension payments and any potential lump-sum withdrawals.
One approach involves combining an account-based pension with either a lifetime or a fixed-term income annuity with a guaranteed minimum income level. Even with this strategy, the proportion allocated to each income option will depend on your circumstances.
The downside with an annuity is that you usually lock in interest rates when you start the annuity and in some cases there are limits to making any withdrawals in addition to the income payments.
For example, we have a retired 67-year-old couple who are homeowners. They have each accumulated $300,000 in retirement savings in their respective superannuation funds. They want an income of $70,000 pa in retirement to fund all their activities and be comfortable. However, they have assessed that they would need an income of $46,000 pa to meet their essential expenses. The $46,000 pa required to meet essential expenses is above the maximum age pension for a couple ($40,237.60 pa as of 20th September 2022). An annuity could provide the gap between the maximum aged pension and the required income for essential expenses.
Is it time to talk to us about retirement planning?
Having the certainty that no matter what happens in retirement, food will always be on the table and you can have air-conditioning in summer can provide you with peace of mind.
Chhaya Bhojani
Financial Advisor
Beyond Bank Australia
