Retirement Income Planning: Live Long and Layer

Australians are likely to live longer and could spend more than 30 years financially dependent on super, investments and the age pension.

In 2010-11, the average retirement age was 53.3 years, 57.9 for men and 49.6 for women, according to the Australian Bureau of Statistics. Today’s 65-year-old man has a life expectancy of 84 and a woman 87, according to official data. Taking into account medical advancements and health improvements, a man’s life expectancy extends to 87 and a woman’s to 90. These are just the median figures. Half of those age cohorts will actually live beyond this.

Today, a heightened awareness of greater human longevity has moved beyond science and the actuarial profession, and into the mainstream, because many people in their 60s find themselves caring for their very elderly parents in their 80s and 90s.

Most of us understand that our capital will need to last a long time. According to a December 2012 study commissioned by National Seniors Australia almost 60 per cent of Australian seniors are concerned they will outlive their savings. This has spawned another approach to retirement investment, so-called income layering, which seeks to provide a certain level of longer-term income from a number of complementary retirement investments. By focusing on cash flow instead of future wealth maximisation, the income layering approach most closely replicates the manner in which people funded their lifestyle during their working lives, while also giving them the flexibility to spend more in the earlier, more active years of retirement.

The move from reliance on a monthly or fortnightly wage or salary to irregular income from super and other investments is highly uncertain and worrisome for many people. For this reason, long-term cash flow matching or income layering is one of the more logical and intuitively appealing retirement investing approaches. It smooths the transition from budgeting against a monthly salary to living on investment income and capital.

The basic income layering approach is straightforward. The starting point is to understand your individual goals and objectives in retirement. This may include desired fixed monthly amounts of basic income, private health insurance, annual overseas travel, new cars and leaving an inheritance. These objectives are ordered in terms of necessity and from this, a cash flow profile can be drawn up and assets allocated to match known and intended spending. A three-tier strategy is usually enough to match future cash flow to future expenses. Rice Warner actuaries say about 75 per cent of Australians over 65 are eligible for at least a part age-pension, so many retirees’ investments will feature this pension entitlement as the cornerstone, the first layer. Because it’s a defined benefit lifetime income stream, the age pension is, in many ways, the perfect retirement product. Payments are fortnightly, which helps match outgoings, the payments are certain, indexed to inflation and last for life, no matter how long you live.

Though many are forced to rely on the full age pension, no one is suggesting it is a truly adequate retirement income. The full age pension is $21,018.40 a year. Most clients will require other income to maintain even a modest standard of living. According to the Association of Superannuation Funds of Australia, a single person requires $41,169 a year to fund a comfortable lifestyle, more than double the full age pension. This is where the second layer, a form of private pension, becomes appealing. Income from this second layer provides a higher base level of income, bridging the gap between regular outgoings and age pension entitlements. Hence its cash flow profile must also be certain, monthly, indexed, and for life. A contemporary lifetime annuity is an option for the second layer, as it can provide fixed monthly indexed lifetime payments and, in some cases, could help clients qualify for greater age pension entitlements. The third and final layer, the account-based pension, is intended to fund discretionary spending, such as on travel and other luxuries, and to be liquid enough to be drawn on in an emergency. Because it is not needed for living expenses, this layer can be invested in more volatile assets which may yield higher returns. When markets are strong, this can fund a higher standard of living in the active, earlier years of retirement. When markets are weak, capital allocated to this third layer can be preserved because the cost of living is being funded by layers one and two.

By matching cash flow over the long-term, income layering helps retired clients to enjoy peace of mind, avoid excessive frugality and spend more freely in their active years, confident their basic income will be there for life, no matter how markets perform or how long they live.


The benefits of obtaining professional financial advice became obvious last week for Wembley Downs man John Pritchard. The 66-year-old director of a small company manages his own superannuation fund, which has a modest balance, and owns his home. Careful investment has allowed him to build a property portfolio in which he enjoys equity of about 40 per cent. He is financially literate and ahead of the game in terms of planning for his retirement. But even a light evaluation by a team of professional planners, organised by Your Money as part of Financial Planning Week, identified areas in which he could improve his chance of achieving his goal of retiring on a secure income within 18 months. Randall Stout, chairman of the WA chapter of the Financial Planning Association, and Malcolm Evans, of Alder Partners, reviewed Mr Pritchard’s position and saw areas for improvement. They recommended:

  • Using an offset account linked to his investment debt to save interest, rather than earn a low rate of interest on his savings that was taxable, for a total annual saving of more than $2000.
  • Selling some of his investment properties to retire debt and using super contributions to reduce the capital gains tax paid.
  • Reducing the tax payable on his estate by his adult children through an overhaul of his SMSF strategy, for a saving of more than $30,000.
  • Introduce the concepts of enduring powers of attorney and enduring powers of guardianship in estate planning.
  • Change his investment strategy from one dominated by cash to one geared more to growth.

Mr Pritchard will qualify for a seniors health care card. “Don’t leave seeking professional help too long. I should have started the process five years ago,” he said.

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