The best passive income in retirement is not a single investment. It is a mix of income sources that work together: super drawdowns that keep growing while you spend them, dividends that land quarterly without you needing to sell anything, interest income that provides a stable floor, and eventually the Age Pension that covers a meaningful chunk of your annual costs.
Most Australians in retirement rely on one source, usually super, and manage it reactively. The ones who retire most confidently tend to have two or three income streams working at the same time, each with a different job to do. This article covers the main options, what they realistically produce in 2026, and how they interact with the Age Pension.
Why Passive Income in Retirement Is Different to Pre-Retirement
Before you retire, passive income is usually about building wealth: reinvesting dividends, growing a property portfolio, salary sacrificing into super. After you retire, the goal shifts. Passive income in retirement is about generating reliable cash flow that covers your spending without needing to constantly sell assets or make active decisions.
The other difference is tax. Once you retire and convert your super into a pension phase account-based pension, investment earnings inside super become completely tax-free. That changes the maths significantly on what generates the most income net of tax compared to assets held outside super.
The Age Pension also creates an interaction most people do not think about clearly. Income and assets from passive income sources count in Centrelink’s income and assets tests. Generating more passive income outside super can affect your Age Pension entitlements, sometimes reducing them by more than the income itself generates. This is not a reason to avoid passive income, but it is a reason to structure it thoughtfully.
1. Account-Based Pension: The Core of Most Retirement Income Plans
An account-based pension is what most Australians use to convert their super into regular retirement income. You roll your accumulated super balance into a pension phase account, and from that point investment earnings are tax-free. You draw a regular income, control your drawdown amount above the government minimums, and the remaining balance stays invested and growing.
What it realistically generates: At a 5% to 7% net return on a balanced to growth investment option, an account-based pension on $500,000 generates $25,000 to $35,000 a year in investment returns before drawdowns. At the standard 4% to 5% minimum drawdown rate for someone aged 60 to 64, you are drawing $20,000 to $25,000 a year while the balance continues compounding. This is not purely “passive” in the purest sense, but it is the most tax-efficient income source available to Australian retirees.
The key decision: Your investment option inside the pension determines your actual return. A cash or conservative option at 2% to 3.5% loses ground to inflation over a 25-year retirement. A balanced option at 5% to 7% keeps your balance growing between drawdowns. Scott and Phil covered exactly this in Episode 1 of the Wealthlab Podcast, comparing a growth portfolio to a conservative one over a long retirement on identical spending. The growth portfolio funded retirement decades longer. Watch Episode 1 on YouTube.
Age Pension interaction: Assets in your account-based pension count toward the assets test. Your income from drawdowns may also count under the income test depending on your age. Managing your drawdown rate deliberately in the years approaching 67 affects your pension entitlements.
2. Australian Shares and Dividend Income
Australian shares, particularly large-cap ASX companies, are well known for dividend income. The Australian market has historically provided higher dividend yields than most other developed markets, typically 4% to 5% gross, with many dividends coming with franking credits attached.
What it realistically generates: A $200,000 share portfolio in a diversified mix of ASX dividend-paying shares or an income-focused ETF might generate $8,000 to $10,000 a year in dividends, plus franking credits worth an additional $3,000 to $5,000 depending on the franking level. For a retiree in the zero or low tax bracket, franking credits can be refunded in cash through your tax return, making fully franked Australian dividends particularly valuable.
The franking credit advantage: For retirees with little or no other taxable income, franking credits are often refunded entirely. A $7,000 dividend with $3,000 in attached franking credits can result in a $3,000 cash refund from the ATO on top of the dividend received. This is one of the most distinctive features of Australian retirement investing and worth understanding clearly. For more detail on how this works, the ATO’s guide to franking credits explains the mechanics.
Age Pension interaction: Shares are assessable assets under the assets test. Dividends count as income under the income test. A significant share portfolio may reduce your Age Pension entitlements. The right balance between shares held inside super (as part of your account-based pension) versus outside super depends on individual circumstances.
3. Interest Income: Term Deposits and High-Interest Savings
With the RBA cash rate remaining elevated into 2026, term deposits and high-interest savings accounts are generating meaningfully positive returns for the first time in years. This is simple, low-maintenance income with government deposit protection up to $250,000 per institution.
What it realistically generates: High-interest savings accounts in 2026 are paying 4.5% to 5.25% for balances meeting eligibility criteria. Term deposits are offering 4.5% to 5% on 12-month terms as at May 2026. On a $100,000 cash holding, that is $4,500 to $5,250 a year in interest income, fully liquid and completely predictable.
The role of cash in retirement: Most financial advisers suggest keeping one to two years of spending in cash or near-cash holdings in retirement. This is not primarily for the income, it is to ensure you are never forced to sell growth assets (shares or the growth portion of your super) at a market low point to fund everyday living. The interest it earns is a bonus. The stability and liquidity are the main benefit.
Age Pension interaction: Cash and term deposits are assessed assets. Interest income counts under the income test. However, Centrelink uses “deeming” rates rather than actual interest rates to assess the income from financial assets. As at May 2026, the deeming rates are 0.25% on the first $62,600 of financial assets for singles (or $103,800 for couples) and 2.25% above that threshold, regardless of what your assets actually earn (Services Australia). This means earning above the deeming rate does not affect your pension. Earning less does not help either.
4. Investment Property and Rental Income
Rental income is one of the most discussed passive income sources in Australia, and it is genuinely powerful when structured well. It also comes with real ongoing involvement: property management, maintenance decisions, vacancy risk and the occasional difficult tenant. It is passive compared to active work, but it is not as hands-off as dividends or interest.
What it realistically generates: A $600,000 investment property in a major Australian city might generate $24,000 to $30,000 a year in gross rental income at 4% to 5% yield. Net of property management fees (8% to 10%), rates, insurance and maintenance, the net income is typically $18,000 to $24,000. Capital growth adds to total return over time, but does not generate spendable income directly.
The Age Pension complication: Investment property is a significant assessable asset and rental income is assessable income. Both affect Age Pension entitlements under the assets and income tests. Many Australians approaching retirement with an investment property find they receive little or no Age Pension despite modest liquidity, because the property pushes them well above the assets test threshold. Selling the property before pension age and repositioning the proceeds in a more pension-friendly structure is a planning decision worth examining carefully with a financial adviser.
Phil and Dan covered the interaction between investment property and the Age Pension with a real case study in Episode 10 of the Wealthlab Podcast, including a specific example where selling an investment property in a final working year versus the first retirement year produced a $25,000 CGT difference. Watch Episode 10 on YouTube.
5. Australian REITs: Property Income Without the Property Management
Australian Real Estate Investment Trusts (A-REITs) listed on the ASX give exposure to commercial and residential property income without owning property directly. They are required to distribute the majority of rental income to unitholders, making them consistent income payers. No tenants to manage, no maintenance calls, full liquidity.
What it realistically generates: ASX-listed A-REITs typically yield 4% to 6% in distributions. On $100,000 invested, that is $4,000 to $6,000 a year in income. Unlike direct property, this is liquid, can be sold in minutes, and the minimum investment is a single unit.
The trade-off: A-REITs do not carry the capital growth trajectory of direct residential property in Australian capital cities over the long term. They are more correlated with equity markets than direct property. In a rising interest rate environment they can fall in price. They are income-focused, not growth-focused, which is appropriate for retirement but means the total return picture is different from direct property.
6. The Age Pension: The Passive Income Most Australians Underestimate
This one sounds obvious but is genuinely underestimated. For a single retiree, the full Age Pension in 2026 provides approximately $29,754 a year including supplements. For couples, $44,856 combined. These figures are updated twice yearly and are indexed to cost of living (Services Australia, May 2026).
For someone spending $50,000 a year in retirement, the Age Pension covers more than half of that from a single passive income source that requires no capital, carries no market risk and is indexed to inflation. The question is not whether to include it, but how to structure your other assets to maximise what you receive.
Phil covered a real case study in Episode 9 of the Wealthlab Podcast where independent advice changed a client’s Age Pension entitlements significantly compared to what their super fund had suggested. The difference in structuring can be thousands of dollars a year. Watch Episode 9 here.
Our pension and Centrelink page covers how the assets test, income test and deeming rates work in practice.
What a Sustainable Retirement Income Mix Looks Like
Rather than relying on any single source, most Australians in a well-structured retirement draw from two or three sources simultaneously:
| Income source | Role | Typical annual contribution |
|---|---|---|
| Account-based pension drawdown | Primary income, tax-free growth | $25,000 to $40,000 |
| Australian shares / ETF dividends | Supplementary income, franking credit benefit | $5,000 to $15,000 |
| Cash interest (term deposits, HISA) | Stability and liquidity buffer | $3,000 to $6,000 |
| Age Pension (from 67) | Floor income, indexed to CPI | $15,000 to $30,000 |
The exact mix depends on your total balance, other assets, housing situation and Age Pension eligibility. The general principle is that income from inside super (via the account-based pension) is the most tax-efficient source, supplemented by assets outside super that either provide stability (cash), income diversity (dividends) or hedge against longevity (Age Pension).
Want to see how your own numbers might stack up across these sources? The free Wealthlab super calculator gives a snapshot of retirement income projections based on your specific balance and spending.
The Age Pension and Passive Income: What to Watch
This is where many retirees inadvertently undermine their own position. Every assessable asset and income source reduces Age Pension entitlements under the assets test (by $3 per fortnight per $1,000 above the threshold) and the income test (by 50 cents per dollar of income above the free area for singles).
Maximising passive income and maximising Age Pension entitlements are not always the same goal. The right balance is to structure assets and income in ways that generate what you need to live comfortably, while not generating significantly more than you need from assessable sources that simply reduce your pension dollar for dollar.
This is an area where professional advice consistently delivers measurable value. The structuring decisions made in the two to three years before turning 67 affect entitlements from day one and compound over the following decade.
FAQ: Passive Income in Retirement in Australia
What is the best passive income for retirees in Australia? For most retirees, the highest-value passive income combination is an account-based pension drawing down tax-free earnings from inside super, supplemented by the Age Pension from 67. Adding Australian share dividends with franking credits and a cash buffer for stability is a common and well-suited structure. The right mix depends on total assets, housing situation and Age Pension eligibility.
How much passive income do I need to retire in Australia? ASFA’s February 2026 standard puts comfortable retirement income at $54,240 a year for a single homeowner and $77,375 for a couple. Many Australians find their actual spending is lower, particularly in early retirement. The Age Pension covers $29,754 a year for singles and $44,856 for couples, meaning super and other assets only need to fund the gap.
Do rental income and dividends affect the Age Pension? Yes. Both count as assessable income under the Age Pension income test. The assets themselves also count under the assets test. Centrelink uses deeming rates rather than actual returns to assess income from financial assets (shares, term deposits, cash), but actual rental income is assessed as received. Structuring assets to manage this interaction is a core part of retirement planning.
Is super the best passive income source in retirement? Inside an account-based pension in retirement phase, super earnings are tax-free, withdrawals are tax-free for most retirees over 60, and the balance keeps growing between drawdowns. For most Australians, this makes it the most efficient passive income source available. The quality of the income depends heavily on the investment option chosen inside the pension.
How do franking credits work for retirees? Fully franked dividends come with attached tax credits reflecting the 30% company tax already paid. For retirees with little or no other taxable income, these credits are often refunded in full through their tax return. This can add $3,000 to $6,000 a year in cash refunds for someone holding a meaningful Australian share portfolio, making fully franked dividends particularly valuable for tax-efficient retirement income.
What is the deeming rate for the Age Pension in 2026? As at May 2026, Centrelink deems financial assets (bank accounts, term deposits, shares, managed funds) to earn 0.25% on the first $62,600 for singles (or $103,800 for couples) and 2.25% above that. These rates are used to assess income for the Age Pension income test regardless of actual returns. Current rates at Services Australia.
Can I generate passive income and still receive the Age Pension? Yes. The Age Pension uses an assets test and an income test, and you receive the higher reduction under whichever test applies. Assets under the full pension threshold ($314,000 for a single homeowner as at May 2026) and income under the free area attract the full pension. Even above these thresholds, a part pension is payable up to the cut-off.
What to Do Next
Building a sustainable passive income in retirement is not a single product decision. It is a structure that combines super, the Age Pension and supplementary investments in ways that maximise what you actually receive net of tax and after Centrelink assessments. Getting that structure right before you retire, particularly in the two to three years before 67, makes a material difference.
If any of this has raised questions about your own retirement income mix, book a free, no-pressure chat with the Wealthlab team. Or take the free Wealthlab retirement quiz for a general read on where you stand.
