July is the most popular time of year to retire in Australia, for tax reasons. Payouts are received at the beginning of a new tax year. Those retiring this July are faced with an extra challenge as well as those already evident.
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For several years record low interest rates have made earning an adequate income from cautious investments very difficult, unless retirees have a great deal of money.
This year’s new retirees face this problem too. They also face the new challenge of a much tougher Centrelink assets test.
It will be much harder to qualify for a substantial age pension to boost retirement income. The threshold assets levels up to which full pensions are paid are reasonable, but if retirees have assets above those levels age pensions are cut down very rapidly.
In fact retirees need to earn 7.8 per cent income from their investments just to replace the pensions they lose because they have the extra savings.
This is very difficult and retirees must use investment options that are less stable than they may have preferred.
Some commercial property funds pay 7 to 8 per cent income. One on offer currently is leased mainly to Queensland Government departments on long leases and expects to pay investors 7.3 per cent per annum. Most residential properties currently pay 2.5 to 4 per cent net income.
Some major company shares pay dividends of 7 per cent per annum and more. For example Telstra currently pays cash dividends of 7 per cent that are fully franked. That means they carry a tax credit of another 3 per cent for a total income of 10 per cent.
Other companies paying high franked dividends include AMP, ANZ Bank, CSR, Westpac, Harvey Norman, National Australia Bank, IOOF, QBE Insurance, Macquarie Group and Tabcorp. Companies could reduce their dividends in future but these ones appear less likely to do so.
There are also property funds traded on the share market that pay high dividends such as Cromwell and Growthpoint. Cromwell owns around $2 billion worth of property and pays 8 per cent dividends derived from rents.
The most popular solution to the challenge of generating income in retirement is account-based pensions. These have the benefit that their total return including capital growth can be used to provide cashflow to live on.
Account based pensions also allow retirees to choose more conservative investments if they wish and still draw a relatively high income. Though this may cause a gradual decline in the account value, the flexibility is useful. Professional advice can be a big help.
