Retirement can be funded from 5 basic classes of income/assets, which are:
- Capital gains
- Government pension
Income is the obvious one. You invest in shares or property and receive dividends or rents. You could also work if you had to.
Capital gains is also relatively obvious, but often not considered by the ‘never sell’ type.
Capital gains are often better than income because they are taxed at half the rate of income (using the 50% CGT discount). Capital gains can be obtained by selling longer term held assets such as shares or property.
Capital, or Corpus, is not usually considered directly, but many financial planners and government websites assume you will eat into your assets so that on the day you die you will have $1 in the bank. This is similar to capital gains, but different because you are eating into the original cash you have contributed to the investment there is no tax payable.
This could be cash in offset accounts – which can be a great way to fund retirement as where the offset is attached to an investment loan the increased interest will be tax deductible.
It could also be from the proceeds of shares of property after they are sold.
Borrowing is still possible, but it will be very unlikely most people will be able to utilise this in their retirement. One way to possibly do it is to borrow as much as possible just before retirement and to slowly use these funds. Another way is the reverse mortgage products.
One method rarely considered though is borrowing from children to fund your retirement. This can benefit both parent and child because instead of selling that property and losing future growth, paying extra tax etc, the child could lend you some money on the expectation of inheriting the property at a later date.
The pension is the backup strategy for many– government will fund your retirement if all else fails. Some can also get a part pension combined with part from one or more of the other classes above.
Note that I didn’t include superannuation as a separate category above, as income from super wil be in one of the above forms anyway.