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.