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Pension strategies in retirementMelanie Dunn
SMSF Technical Services Manager, Accurium
Disclaimer
This information is provided by Accurium Pty Limited ABN 13 009 492 219 (Accurium). Itis intended for SMSF professionals only. It is taxation information only and is not intendedto be financial product advice or legal advice, and should not be relied upon as such. Theinformation is general in nature and may omit detail that could be significant to anindividual’s particular circumstances. Scenarios, examples and comparisons are shown forillustrative purposes only and should not be relied on by individuals when they makeinvestment decisions. Whilst all care is taken in the preparation of this presentation, nowarranty is given with respect to the information provided and Accurium is not liable forany loss arising from reliance on this information. We recommend that individuals seekappropriate professional advice before making any financial decisions.
A successful retirement strategy is like a good
bottle of wine…
Making the best vintage…• Harvest time - retirement is different
• The blend - three retirement strategies
• Savour the drop - the opportunity
Harvest timeRetirement is different
Accumulation phase Retirement Aged CareTransition to Retirement
Picking a blendStrategies for retirement
Age Pension Non-Super Super
Sources of retirement funding
Client goals Investment choices
Needs and desires Cashflow management decisions
• How much spending is feasible?
• How to spread spending power across multiple goals?
• How does the strategy affect Age Pension?
• How to allocate assets among investment classes?
Retirement funding strategies
• Retirement toolkit• Age Pension
• Market linked investments
• Guaranteed investments
• Spending decisions
• Retirement strategy philosophies• Secured = safety first
• Self managed = probability based
Spectrum of retirement strategies
Secured
Self Managed
Safe spending
rate
The safe withdrawal rate• Self-managed probability based strategy
• How much can I spend from super for assets to last 30 years?
• US shows 4% as a safe withdrawal rate
• Issues in Australia’s retirement income system• Minimum pension rules
• Means tested Age Pension
• Proportion of savings needed to fund spending varies over time
Holistic approach to safe spending
• Overall spending rate vs Safe withdrawal rate from SMSF
• Allow for realistic spending shapes in retirement
• Stochastic modelling to quantify how safe spending is
Case study: Adam and Jess• Adam and Jess both aged 65
• Total retirement savings $1.65million
• Desire spending that keeps pace with inflation and drops 30% when first spouse passes away
• SMSF invested in ATO pension phase average asset mix
• Non-super in balanced asset mix
Case study: Safe spending rate• Adam and Jess have $1.65million
• ‘Safe spending rate’ = provides desired level of confidence
• Their decision: $75,000 pa
Initial SafeSpending Rate
80% confidence 95% confidence
Dollars p.a. $88,000 $75,000
% p.a. 5.3% 4.6%
Safe spending rate for varying wealth• High wealth levels: 95% confidence safe spending rate of around 4%
Australian safe spending rates for a 65-year old couple(assuming spending keeps pace with inflation, but drops 30% when the first spouse passes away)
Total retirement savings ($)
Spending rate p.a.: 80% confidence
Spending rate p.a.: 95% confidence
Spending rate %:80% confidence
Spending rate % 95% confidence
$500,000 $51,000 $47,000 10.3% 9.4%
$1,000,000 $67,000 $59,000 6.7% 5.9%
$1,500,000 $84,000 $72,000 5.6% 4.8%
$2,000,000 $104,000 $86,000 5.2% 4.3%
$3,000,000 $149,000 $120,000 5.0% 4.0%
$4,000,000 $196,000 $156,000 4.9% 3.9%
Using the safe spending blend• ‘Self-managed’ strategy
• Australia’s retirement system invalidates any simple ‘rule of thumb’
• Regularly review household’s situation each year
Income buckets
in an SMSF
Investing in growth assets• Potential for greater long term returns
• Risk of significant fall in capital values in short term
Australian equity returns over every 10-year period since 1883
The typical SMSF strategy• Balanced investment approach
• Regular pension drawings
SMSF
Income bucket strategy• Increase potential for greater returns by reducing sequencing risk
• Secure required income so you don’t draw down on growth assets
Cash
Income
Growth
Income bucket strategy in practice• What are the spending requirements to secure?
• What investment to use to secure income?
• Term deposit or bond ladders
• RCV0 term annuity
• Measure of success
• Increase in SMSF balance at the end of the term
• No increase in downside risk
Case study: Adam and Jess’ SMSF• Adam and Jess both aged 65
• Total retirement savings of $1.65 million
• Spend of $75,000 pa (95% confidence)
• SMSF balance of $1.1 million• ATO average pension phase asset mix
• Draw minimums from the SMSF
• Secure 10 years of income
Case study: Adam and Jess’ SMSF
• Income bucket: $55,000 pa income secured for 10 years
• The distribution of outcomes across all scenarios
$901,000 $944,000
Case study: Adam and Jess’ SMSF
Income bucketing strategy• Likely to be effective at improving SMSF outcomes
• Disciplined approach to investing
• Aligning need of security and long term growth
Income layering
Spending in retirement• Most SMSF retiree’s will have a minimum lifestyle they consider essential for life
• Breakdown desired spending
• Secure essentials with guaranteed income sources
• Maximise discretionary spending
Essential
Discretionary
Income layering strategy
Self-managed income fordiscretionary spending
Secured income to meet lifetimeessential spending
Age Pension
Will vary with market swings
Discretionary spending
Essential spending
Reduction in essential spending on first death
Case study: Adam and Jess• Adam and Jess now aged 75
• Total retirement savings $900,000
• $800,000 - SMSF asset mix in line with ATO pension phase average
• $100,000 - balanced non-super asset mix
• Safe spending to have 95% confidence
• 1 in 20 chance not sustainable
Case study: Adam and Jess• Essential spend
• $58,915 p.a. for life
• Desired spend
• $100,000 p.a. for 5 years
• Spending shape:
• Keeps pace with inflation
• Drops 19% when first spouse passes away
Case study: Adam and Jess’ essentials• Essential spending for life $58,915 pa
• Age Pension could contribute $33,982
• Max Age Pension reduction means spend reduces by 19% on first death
No secured essentials $24,933 secured in lifetime annuities
Case study: Adam and Jess’ confidence• Confidence can afford $100,000 pa for 5 years, $58,915
for life • 90% without strategy
• >99% with income layering strategy
• Strategy increased overall sustainability of desired retirement
• PLUS income layering strategy has secured essentials for life
Income layering strategy in practice• Where this strategy can add the greatest value:
• A household with a lower essential spend
• At older ages
• Consider the income layering strategy for clients looking for peace of mind in securing essentials for life
Savour the drop• Licencing opportunity
• SMSF retirees are looking for help
• Client’s are happy when needs and wants are addressed
• Be the expert in retirement strategies
Cheers…• Harvest time - retirement is different
• The blend - three retirement strategies
• Safe Spend
• Income Buckets in the SMSF
• Income Layering
• Savour the drop - the opportunity
Thank you
Disclaimer
© SMSF Association 2016
This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation.
Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.