Self-funded income streams are an important component of the wealth management strategies for those who are preparing for, or who have entered retirement. Being self-funded, whether partially or completely is a goal for most retirees and they manage the assets to provide that income in both superannuation and with non-superannuation assets.
There are several ways in which a retiree can provide the income stream required to meet their lifestyle (and emergency) needs – including whether or not, being eligible for any level of the age pension. We understand that most people – by the time they reach retirement – are looking for two key features about their retirement wealth:
- consistency of adequate income; and
- preservation of capital.
Characteristics of self-funded income streams
Falling behind these key requirements for the generation of reliable, sustainable self-funded income streams is a range of financial objectives that will be prioritised differently by individuals according to their circumstances, whether personal or financial. Some of these objectives are –
- trend growth in asset value/ wealth;
- ability to continue ‘comfortable’ lifestyle;
- surplus funds to support family and community; and
- ability to meet occasional discretionary capital expenditures.
Each of the above features when achieved in unison (or at least in the majority), constitute a position of ‘financial independence’. How is such wealth held; and which structures are tax-effective in this phase of life?
Strategies to accumulate wealth from which income streams are generated
There are two broad areas from which income streams can be generated: superannuation; and non-superannuation.
Superannuation funds can provide income streams in the following forms (subject to relevant ‘conditions of release’ having been met):
- withdrawal of irregular funds, based on ‘earnings’ of the fund;
- Allocated Pension;
- Transition to Retirement Allocated Pension;
- Term Allocated Pension; and
- (through other mediums) purchased Annuities.
Note: the three Allocated Pension references within the Superannuation listing above all rely on an eventual drawdown from capital. In certain circumstances, a similar process could be structured in a non-Superannuation environment.
Income streams from non-superannuation sources can be drawn without any consideration of conditions of release (such as are encountered in a superannuation context), and can be in the following forms:-
- withdrawal of irregular funds, based on ‘earnings’ of the fund; or
- (through other mediums) purchased Annuities.
One such non-superannuation asset (in most circumstances), is property. This is an asset class that has been popular in Australia with several generations.
The income tax consequences of self-funded income streams should be considered before implementing a strategy to rely on them. The most effective time to do this (where practicable to do so) is prior to retirement, during the wealth accumulation phase.
Contact your Continuum Financial Planner for advice on an investment strategy to satisfy your retirement planning needs and circumstances: use our Contact Us facility – or phone us on 07-3421 3456 – for prompt attention and an initial meeting at our cost. You can check the qualifications and experience of each of our advisers, at the Financial Adviser Register on the MoneySmart website maintained under the auspices of ASIC.
(This article was first posted in November 2009: it has occasionally been updated and refreshed, most recently during February 2020.)
