Retirement Strategies – Income Funds
If you are looking for retirement income only and not interested in the volatility of equity based funds (stocks, ETFs and Property Funds) then there are income based products and investments that only provide income, these are called ‘defensive’ investments because they defend against market volatility.
Term deposits
Term deposits are a simple product which may be favoured for later retirement as they can be used to produce stable income in a low-risk environment. As people get older their need for secure and predictable retirement income increases and they would need more constant requirements such as aged care. As a result Term Deposit funds may be suitable for a retiree in elderhood as their required income will likely be more predictable.
Annuities
This product is well-suited to many retirees as it ensures regular, fixed retirement income which removes uncertainty. Although more expensive than other options, annuities are low-risk and a retiree can purchase annuities that will pay-out for the remainder of their life.
Annuities pay a fixed amount of income for a fixed period of time. You can choose whether you want payments to last for your lifetime or a set number of years. There are also annuities where payments are deferred until you reach a certain age.
You can buy an annuity from a super fund or a life insurance company with savings or with money from your super provided you have reached your preservation age.
The main benefit of an Annuity is certainty of income. You are guaranteed a set income no matter how markets perform, which can bring you peace of mind.
The main drawback is a lack of flexibility.
You can’t decide how your money is invested or withdraw lump sum amounts and depending on the product, they can be expensive and may not pay as much as a market-linked pension over the long term.
In practice, an annuity is often used in combination with an account-based pension to provide peace of mind that you won’t outlive your savings while also enjoying the flexibility and potentially higher returns of an account-based pension.
Some Annuity funds are also partially exempt under the Centrelink Assets Test. With some Annuities, Centrelink will exempt up to 40% of the value of your Annuity purchase amount which increases your age pension amount.
This is a common and well thought out financial planning strategy that a good financial planner will usually include as part of an income based retirement plan.
An example if this would be as follows:
- If you had $100,000 sitting in a cash account then Centrelink will asset test 100% of that amount as a current asset
- If you purchased the correct Annuity product for $100,000, Centrelink would exempt the first $40,000 so you would only be tested on $60,000 which increases your income allowance under the aged pension 😊
Fixed Interest Investments
An option such as a bond will provide regular, predictable income over a set time period and as with term deposits and annuities offers a low-risk investment option for retirees.
DID YOU KNOW – A recent survey showed that retirees biggest worry was about their money running out. When these concerns heighten, such as in times of crisis, the only thing they may feel they are able to control is their expenses which may lead to a more frugal lifestyle.
– Link > Financial Security in Retirement
Real Estate Investment Trusts (REITs)
A REIT is a property fund in which an investor can purchase units. The fund invests in a range of property assets which can be spread across multiple property sectors which is good because it provides diversification across the various types of property such as residential, commercial, infrastructure and so on.
This investment can be a more diversified and cost-effective way for investors and retirees to enter the property market compared to purchasing direct property.
REIT funds are listed on a public market such as the ASX just like stocks and ETFs so they are subject to market risk and volatility.
However, by enabling diversification across property sectors, this investment is an attractive way for retirees to attempt to mitigate their exposure to sequencing risk.
REITs are mostly growth based but also have a yield or income component to their valuations.
Property Income Syndicates
This is a rarely used investment option and usually purchased by wholesale/sophisticated investors who have at least $500,000 or more to invest.
A Property Income Syndicate fund is a product you invest for a minimum period of at least 18-24 months and it pools your money together with several other investor funds to finance property development in residential property.
If you choose to use one of these investments then it’s important you know who the fund manager and property developer is and where the actual property locations are for the fund.
Because the fund manager is a boutique non-bank private company they usually pay a much higher crediting rate when compared to a cash account or term deposit, and by that I mean 10% or more.
The Property Income Syndicate fund acts as a secured lender to the property developer allowing them to develop residential and mixed-use property projects. The fund is then used to settle property acquisitions, fund consultants and holding costs until a development project is completed.
The expected income and payment from this type of fund would be:
- 12-16% pa
- Payments are made quarterly
- Minimum investment term is 18-24 months
The fund can also lend out for cash flow and site purchases, completion of construction on other projects, permits and engineering drawings/plans.
The fund manager retains 100% ownership in the property projects and the funding company and the Project will be managed by the Project Management Team.
Investors will receive Shares in the company and in turn, will become partial registered owners in the company. The ownership percentage of the company is determined by the actual volume of shares held. The company retains a mortgage or caveat from the construction borrower as security for the loan advance which protects your financial position as the investor.
The company will also retain all rights, title and interest in any Development Application lodged or held in relation to the Property.
A good Property Investment Syndicate fund needs to:
- Have an experienced management team behind it who have experience in the successful completion of other property developments for its investors in the past
- Spread investment risk across a series of projects (diversification)
- Access to further funds to allow exit positions as they fall due (liquidity)
- Have a stream of quality projects to lend to which shows very high development profits (profit margins)
- The fund manager must hedge their risk by having a mortgage or caveat over the property being developed as security for the funds.
Be sure to read the section “Know how much income you will need in retirement” on this page which provides some helpful tips in working out your minimum income requirements.
If you are considering investing in a Property Investment Syndicate fund and it doesn’t tick all 5 boxes above then you need to carefully consider whether that fund is the right one for you and has mitigated enough risk.
As mentioned above, these style of funds are not on our APL and are for sophisticated investors only.
If you are considering investing in a property syndicate fund then contact us for a discussion on how this strategy would work in your situation.
Want to Know More?
If you want to know more about how a retirement income product or strategy can work for you, including some financial projections or calculations then fill out the Contact Form below and a retirement income planning specialist will contact you to discuss your situation and answer your questions.
Additional resources taken from the department of Treasury Retirement Income Review