When people talk about retirement income, they usually mean one number: how much comes in each year. I find it more useful to split that number in two. There is the income you can rely on, whatever happens. Then there is the income that depends on things going to plan.
The first part is what I call the income floor.
What sits in the floor
The floor is the income that keeps arriving in a bad year. What counts depends on your position, but it is usually made up of steady, reliable sources. For some people that includes a pension from super set up to pay a regular amount. For others it is rent from properties that are well tenanted and carry little or no debt. Some people will also have the Age Pension as part of it.
What matters is not the label on the income. It is how dependable it is when conditions turn.
What sits above the floor
Above the floor sits income that can move. Rent from a property with a large loan, where a rate rise or a vacancy eats into what is left. Share dividends that can be cut. Proceeds from selling something at a time you did not choose.
None of that is bad income. It simply cannot be relied on in the same way. A retirement that leans on it for the essentials is exposed when it falls short.
Why the split helps
Once the floor is clear, a few questions become much easier to answer:
- Does the floor cover the essentials: housing costs, food, bills, health and insurance?
- How much of the life you want depends on income above the floor?
- If a property sat empty for three months, what would change?
- Is the debt making the floor lower than it needs to be?
These are not questions with general answers. They depend on what you hold, what you owe and how you live.
How to see yours
Your own floor comes from your own figures: each income source, the costs and debt behind it, and how exposed it is. Position and Pathways sets out your income across the positions you are weighing, after tax and in today's money, with the basis for every figure. It shows which parts of your income you can rely on, and which parts you are hoping for.
Seeing the floor clearly is where confidence in a retirement plan starts.
Nicholas Lockhart
General information only. No advice is given. Pension and super rules change and depend on your own circumstances; Services Australia and a licensed adviser can confirm what applies to you.