Business News

Income layering: the key to lifetime income

A common fear for retirees is running out of money, whether it’s due to the rising cost of living, market movements impacting on savings or outliving their savings.

Apart from the safety net of the age pension, there is no ‘free lunch’ for retirees. From an adviser’s perspective, it’s a matter of looking at the household’s financial resources and choosing a strategy that aligns the range of possible outcomes with the household’s needs, objectives and priorities.

What’s in a retiree’s toolkit?

A retiree has a number of options for generating retirement income:
• Means-tested age pension,
• guaranteed or defensive investments, including cash, term deposits and annuities,
• market-linked investments, including property, fixed interest and equities, and
• adjusting spending decisions.

Without a crystal ball, retirement planning is difficult. We don’t know how future markets will perform or how long retirees will live.

There are, however, a couple of characteristics we know about SMSF members that increase their risks in retirement and necessitate careful planning.
1. They tend to live longer, by around three years, according to Accurium research, than the average Australian retiree. This means their assets will need to provide income for a longer retirement.
2. Their balances tend to be higher, meaning lower entitlements to secure income from the age pension. Although a higher balance should lead to a more comfortable retirement, retirees need to carefully manage their assets to ensure they don’t fall short.

Income layering

Accurium’s latest research highlights some key retirement strategies available to Australia’s 1 million SMSF members to help ensure their money lasts for life.

One strategy that is gaining traction due to the certainty it provides retirees is income layering –
using a blend of income streams to meet a client’s spending needs in retirement.

Its rising popularity is likely driven by the recent market turbulence, which is encouraging clients to consider strategies that can provide shelter from the unpredictability of financial markets.

Figure 1 shows how income layering can work:

The age pension and guaranteed income investments can secure essential spending as illustrated by the lower green bars on the chart.

The strategy then looks to market-linked assets to maximise discretionary spending. SMSF retirees will likely have savings above what is required and can afford additional discretionary spending throughout retirement.

This is represented by the blue section of the chart.

This layer is subject to the market and may include options such as account-based pensions. How long these assets last will depend on market returns and the level of spending each year.

Accurium research shows income layering can provide SMSF households with over 99 per cent confidence of meeting their essential spending needs for life.

A case study of income layering for SMSF retirees

SMSF trustees Adam and Jess are reviewing their retirement strategy. They are concerned about the impact on their lifestyle if financial markets crash or if they live a long time. They desire security that they won’t end up relying solely on the age pension.

The table below illustrates how Adam and Jess might implement an income-layering strategy to secure their essential spending for life. They do this by securing the difference or ‘gap’ between the full age pension of $33,982 a year and their essential spending requirement of $58,915 a year with a guaranteed income investment. In this example this means securing an income of $24,933 a year with a lifetime annuity.

Adam and Jess have a 10 per cent chance of running out of money and relying on the age pension if they make no change. Essential spending is not secure.

Alternatively, by securing the gap between the age pension and their essential spending with a guaranteed income product, there is a greater than 99 per cent chance essentials will be secure for life.


To maintain a lifestyle when no longer working, the priority in retirement is to manage long-term cash flows in a sustainable way. It is important SMSF practitioners understand each client’s full cash-flow picture, including their overall retirement objectives.

There is a clear opportunity for SMSF practitioners to show value by helping to provide clients with long-term security. Blended strategies that combine market-linked investments with guaranteed income sources can help provide peace of mind that cash-flow needs will always be met.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital