Having absolute confidence in investment income would be a great feeling. Whether you’re retired, planning for retirement or if you have debt against your investment. Being certain that your investment income will continue for the long-term really does help you sleep at night.
So how do you achieve this? Understanding the difference between various investments and their income is the first step.
A common theory to break this down, is considering investment income is three types:
- Variable income;
- Predictable income and;
- Guaranteed income.
Now we all want guaranteed income but this comes from specific sources like annuities. Annuities will work very well for retirees but presently their earning rates are low and they are very long-term. Specific advice is really needed to be certain that annuity income will suit specific individual needs.
Then of course there’s the trusty term deposit. The term deposit has guaranteed income for the ‘term of that deposit’. If the term deposit is for six months, then guaranteed income is for six months only, if it is for six years it is for six years only. Outside of this term it is not a guaranteed income for life. An example of this is Australian term deposit rates in 2007 were approximately 7.5% per annum, today in 2017 they are 2.5% per annum, definitely variable.
The difference between predictable and variable income may be a fine line. Predictable income can be derived from sources like rent from investment properties, dividends from certain Australian companies, or managed funds that specialise in dividend income or regular income from fixed interest, bond type assets.
However, having one investment property or your money invested in a few Australian companies will certainly provide a sense of predictable income but life tells us things can go wrong. For example, if your property is vacant for three months or there is damage and repairs are needed which absorbs any rent that you would receive. Or perhaps the shares that you own, from time-to-time, vary their dividend per share distribution. This gives us a sense of variable income.
However, with the correct diversification and management, income from these sources can become very dependable or predictable. Having a well-diversified portfolio of Australian shares including fixed interest assets, property and infrastructure you can calculate and rely on a certain income each month and year.
Therefore, achieving predictable income for retirement or to meeting debt commitments, is quite achievable and “Knowledge is Key”. Which is why many Australians who use financial planners, can sleep very well at night knowing that their income is predictable.
Author: Brent Kelly, Financial Planner | Principal | Kelly Wealth Services | March 2018