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6 July, 2020
Reducing your retirement income
First Financial Team
Some of the information in this article may be out of date. We are currently in the process of updating our content to reflect FY26 details.
Back in March, when the country felt the initial financial impact of the COVID-19 pandemic, the Federal Government released a series of stimulus benefits to help support Australians. One of the initiatives within the package was a reduction in the minimum drawdown rates for account based pensions. Designed to help minimise the need for selling investments in a depressed market, the reduced minimum was effective immediately.
We reported on this change in our summary article and today we discuss whether implementing the new minimum for your pension payment is a viable option for this financial year. Lowering your retirement income is an important decision that can impact your lifestyle, so we have outlined some of the points to consider.
The temporary adjusted drawdown rates are outlined in this table. The 50% reduction is applicable for this new financial year 2020-21.
Review your budget
Can you afford it? This is the first question you need to ask when considering a reduction in your retirement income. Your pension payment might be the key factor in supporting your lifestyle and if you reduce it by 50%… what would that do to your day to day life?
It’s quite possible that during the current climate, your income needs have actually reduced… especially if you are no longer travelling or regularly dining out. So this is the perfect opportunity to do a thorough review of your budget. Assess your needs and always make sure you have some extra funds available for unexpected expenses. Seek professional advice if you are unsure of exactly how the new minimum would affect your payments.
Benefits to reducing your pension payments
Utilising the lower drawdown rate does have its benefits. One of the most significant is that your retirement funds remain in their tax-free environment for longer and any money that remains invested will grow once the economy and market recover from the recent downturn.
Reducing your pension payments means more of your funds will be retained in cash. Our unique Investment Philosophy is specifically designed to hold up to 12 months’ worth of income in the ‘cash bucket’ of a portfolio. For retirees, assets within this cash bucket are accessed for the regular drawdown payments. These defensive assets are less volatile, so even during market fluctuations, they provide the same steady income flow.
If you are in a position to implement the reduced minimum rate for your pension, the funds you already hold in your cash bucket will subsequently last much longer than originally expected… and perhaps even provide you with the opportunity to move some funds out of the defensive environment and back into growth investments.
Investment opportunities
If you are in a position to reduce your pension drawdown, now could be an opportunity to invest during a market low… and while we understand that, for some, market instability is daunting, there are others who will seize the chance to buy good quality companies at significantly reduced rates.
If you think this is a strategy you might consider, again, we recommend seeking professional advice.
Some companies will face challenges over the next year or two and you want to make sure your portfolio is structured in a fashion that will continue to support you once the drawdown rates have returned to normal.
Unsure what’s right for you?
The team at First Financial can help you determine what best suits your personal situation.
We are here to answer your questions and provide you with recommendations based on your unique circumstances.
We can help calculate your annual income payments based on the new lower minimum and review whether the reduced pension will be an adequate amount.
If you’d like to speak with one of our experienced financial advisers, please contact us today. Read more Retirement Planning articles.
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