Retirement income you can rely on is worth more than income you hope for. When people talk about retirement income, they usually mean one number: how much comes in each year. I 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.
Retirement income you can rely on: what sits in the floor
The floor is the income that keeps arriving in a bad year. It is usually made up of steady sources: a pension from super drawn from a balance large enough to keep paying, rent from properties that are well tenanted and carry little or no debt, and for some people part of the Age Pension. The label on the income is beside the point; what counts is how dependable it is when conditions turn.
What sits above it
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. Money 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, and a retirement that leans on it for the essentials is exposed when it falls short.
A retired couple have three properties. Two are owned outright and one carries most of its loan. In a good year all three pay well. Then rates rise four times in a year and the geared property needs a new roof. The two clear properties keep paying. The third costs them money. Their floor was the two clear properties all along. Seeing that early let them choose which property to clear next.
Why the split helps
The split turns a general worry into four questions:
- 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 debt making the floor lower than it needs to be?
How to see yours
Your 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 whole income across the positions you are weighing, after tax and in today’s dollars, 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.
If you want to see your own floor, the first conversation costs nothing.
Nicholas Lockhart
Pension and super rules depend on your own circumstances; Services Australia can confirm what applies to you.