Retirement Income Stream to Age 90
Background: Meet Pam
Pam is a long-time client of Yield who separated and divorced from her husband in 2017. Pam is 58 years old and has a daughter who is cared for equally with her ex-husband.
Snapshot of Pam’s Financial Situation (Excluding Lifestyle Assets)
- Income:Â $70,000
- Super balance:Â $529,762
- Other financial assets:Â $13,500
- Debt:Â $0
- Annual Expenses:Â $44,500
Desired Retirement Income: $50,000 + $6,000 travel budget to age 75 in today’s money
Key Results at a Glance
-
Superannuation:Super lasts until age 90, with $100,000 still remaining at that time
-
IRIS:Without IRIS Pam’s super runs out by age 89
-
Age Pension:Approx $28,173 more Age Pension, gained mostly early on in retirement
Why Did She Seek Advice?
- Build a long-term financial plan after separation and divorce.
- Assess affordability of purchasing a home while remaining debt-free.
- Plan for a secure and comfortable retirement.
- Navigate financial uncertainty after COVID-19 impacted her business.
- Determine the right balance between leaving a legacy and securing her own retirement income.
Strategies Implemented
In her 2022 annual review, we discussed again what was important to Pam about her retirement. We re-evaluated things with her, like when ideally she would like to retire; how much income she would need, including extra for travel and car upgrades; and what was important to her between the balance of retirement income stream security and the legacy she may leave behind.
Throughout these conversations, Pam made it clear that she was worried about whether she would have enough for retirement. Covid had impacted a new business she had started and while she was still travelling well compared to the projections we had completed in her 2017 advice, the experience had left her feeling vulnerable.
Considering all of her concerns and objectives, we introduced her to the benefits of a pension product that we thought may be suitable for her, known as an Innovative Retirement Income Stream (IRIS). We talked about the potential Age Pension benefits and after discussion she was interested to see advice on how it may work for her situation and needs.
This case study highlights the tailored advice given to Pam on IRIS, and how it was used to enhance her retirement income.
Overview and Findings from Our Analysis:
- A detailed financial analysis was conducted to evaluate Pam’s projected retirement outcomes.
- Modelling her current superannuation strategy revealed that her financial assets would likely be insufficient to meet her retirement income needs through to age 90.
- This highlighted a risk of outliving her savings and prompted exploration of alternative strategies.
- Introducing the Innovative Retirement Income Stream (IRIS) significantly improved her projected outcomes.
Under the IRIS strategy:
- Pam’s projected remaining financial assets at age 90 increased to $100,904, compared to near depletion under her existing super fund.
- The structure allowed for a more favourable assessment of the IRIS for Age Pension purposes, amounting to approximately $28,173 of extra age pension to age 90, with most of the advantage gained early on in retirement.
- Consequently, this means that Pam can comfortably meet her retirement income needs by drawing down on fewer of her own financial assets, affording her greater financial flexibility and peace of mind throughout her retirement years.
- Based on these findings, we implemented the following strategic changes to strengthen Pam’s retirement position.
Transition to an IRIS-Compatible Super Fund:
- Advised Pam to roll over her full super balance into an IRIS-compatible fund, offering a structured approach through three phases: accumulation, deferred income, and full retirement.
- No obligation to use the IRIS income stream at retirement. She is free to roll it over to an alternative super fund at any time, before commencing an income stream.
- This flexibility allows for ongoing review and adjustments to ensure the strategy remains suitable over time.
Accumulation Stage (Pre-Retirement Phase):
- During this stage of Pam’s financial journey, her IRIS super fund functions similarly to any other superannuation accumulation account.
- The recommended fund is cost-effective (~1% total cost), aligning with Pam’s preference for low-fee investing while offering personalised portfolio construction.
- Pam retains full flexibility during this stage and can roll her funds to another accumulation fund at any time if her circumstances change.
- Centrelink assesses the account using a standard formula: Contributions + Earnings – Withdrawals but assumes earnings at the maximum deeming rate (currently 2.25%), regardless of actual performance.
- Note the chart shows the balance while Pam is still working and the growing difference between the Actual Balance and the Centrelink Assessable Balance, which is all on account of the fund performance being greater than the deeming rate.
- At age 65, we recommended Pam transfer $350,000 to a standard Account-Based Pension to ensure she retains access to liquidity for lifestyle needs.
- This transfer sacrifices IRIS Centrelink advantages on that portion but optimises the balance between Age Pension entitlement and access to funds.
- Importantly, under IRIS, even when the fund performs better than the 2.25% deeming rate, Centrelink still assesses the account at the lower deemed value, creating a favourable gap.
- Upon meeting a full condition of release after age 60, Pam can choose to - Roll over her balance to another super fund, or Commence the Deferred Income Stage or Full Income Stage under IRIS.
- Once funds are into one of the income stages under IRIS, Pam will no longer be able to make lump sum withdrawals, so retaining funds in an Account-Based Pension is critical for planned expenses (e.g., holidays, car purchases, home upgrades).
- The ideal split between IRIS and Account-Based Pension is determined through analysis of future needs and Centrelink outcomes.
Deferred Income Stage:
- Pam can continue contributing to her IRIS account during this stage and Investment earnings are tax-free, enhancing potential long-term asset accumulation.
- Pam receives annual bonuses from the fund provider, calculated based on her age and selected death/exit benefits, helping guard against premature depletion of her balance.
- A key advantage is that only 60% of the account’s deemed value is assessed for Centrelink’s asset test, and no income is assessed, significantly improving her Age Pension eligibility.
- Pam can make limited withdrawals, based on her age, under the Capital Access Schedule.
- These withdrawals provide additional income when needed and also reduce the assessable balance further, offering a dual benefit for Centrelink testing.
- This phase strikes a strategic balance between preserving assets, enhancing Age Pension entitlements, and providing flexibility, making it a valuable component of Pam’s retirement income plan.
Full Retirement Stage:
- Pam begins receiving an automatically calculated maximum annual income, designed to provide stable retirement cash flow.
- She has the option to draw a lower amount, which can enhance her Age Pension entitlements and extend future withdrawal flexibility.
- Annual bonuses continue during this stage, acting as a buffer to help protect against the premature depletion of her account balance.
- Centrelink asset testing becomes even more favourable, with only 60% of the deemed value of the income stream initially assessed and this reducing to just 30% after age 84, significantly improving social security eligibility.
- This below graph shows that only 60% of the lower ‘deemed’ value of the pension is assessed for Centrelink’s asset test purposes. Importantly, the 40% discount only applies once it moves to the deferred income or full stage.
Outcomes and Benefits
- Projected financial modelling shows Pam will now retain $100,904 in assets at age 90, compared to near depletion under her previous strategy.
- IRIS structure resulted in an estimated $28,173 in additional Age Pension benefits over her retirement, thanks to more favourable Centrelink treatment.
- Investment earnings in the IRIS account are tax-free once in retirement phases, enhancing long-term asset growth.
- A strategic $350,000 transfer to an Account-Based Pension ensures access to funds for lifestyle needs, such as holidays, car upgrades, or renovations.
- Annual provider bonuses across deferred and full retirement stages support balance longevity and help safeguard against market volatility and longevity risk.
- Boosted Age Pension eligibility through IRIS’s favourable Centrelink treatment (only 60% later 30% of deemed value assessed).
Key Takeaway
Pam’s story shows how thoughtful, personalised financial advice can empower you to face life’s unexpected turns like divorce, business setbacks, and retirement planning with greater confidence. By integrating IRIS, we helped Pam turn her concerns about outliving her savings into a secure, flexible, and tax-effective retirement strategy. She now has access to more Age Pension benefits, stronger income stability, and the peace of mind of knowing she can enjoy her retirement while keeping options open for future changes.
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Important Note
Produced with our client’s permission. Names within this case study have been changed to protect the client’s right to privacy. The content of this case study has been based on a real-life client. Any information provided here is general advice only and does not consider your objectives, financial situation or needs. This information should not be taken as comprehensive and does not constitute legal or financial advice. You should seek legal, financial or other professional advice before relying on any content. Yield Financial Planning is not responsible to you or anyone else for any loss suffered in connection with the use of this information. Information is only current at the date initially published.
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