SMSF cashflow strategy Securing cashflow to generate long term - PowerPoint PPT Presentation

SMSF cashflow strategy Securing cashflow to generate long term growth www.accurium.com.au www.challenger.com.au

Agenda • SMSF cashflow strategy - Controlling sequencing risk - Securing cashflow - Maximising SMSF balance • Case study of the SMSF cashflow strategy • Illustrating the outcomes - Challenger Cashflow Illustrator General advice warning: This presentation may contain some general advice. This means that individual objectives and needs have NOT been considered in providing this advice. It is not appropriate for us to provide personal advice in this forum. 2

SMSF cashflow strategy www.accurium.com.au P | 1800 203 123

SMSF exposure to sequencing risk • Growth assets provide potential for greater long term returns • Risk of significant fall in capital values in short term • A cashflow strategy alleviates sequencing risk by - using assets that provide a guaranteed income to lock in cashflow - protecting growth assets from being drawn on 4

How long is long enough? • Exposure to growth assets increases exposure to market risk • Need to secure cash flow for at least 6 years in order for growth opportunities to be realised even in unlikely event of a downturn 5

Illustrating sequencing risk • Drawing a cashflow introduces sequencing risk • Actual historical investment returns and inflation (Source: Vanguard 2013 Index Chart) 6

Reduce sequence risk • Balanced investment approach + regular pension drawings • Increase potential for greater returns by securing income so don’t need to draw on growth assets 7

SMSF cashflow strategy Tying strategy to SMSF objectives Three key goals SMSFs are looking to achieve: Guaranteed cash flow : ensure minimum pension payments are paid so fund can 1. claim tax exempt income 2. Free up capital for growth : invest in growth assets to maximise balances available during retirement Maximise SMSF balance while controlling risk : invest in growth opportunities while 3. controlling downside risk 8

Implementing the cashflow strategy 1. Pick a desired term – typically 6-10 years 2. Secure cashflow over the term 3. Invest remaining capital to maximise SMSF balance over the term 4. Assess the strategy against a range of risk measures 9

Guarantee cashflow Challenges in funding cashflow in an SMSF • No cash flow required in accumulation phase….retirement is different • Cash flow required in pension phase - Minimum pension requirements - Spending to fund retirement • Current practise for funding cashflow: - Cash accounts are hard to manage without discipline - Term deposits inefficient use of capital (max 5 year terms) - Dividends/rent could dry up in downturns and is cyclical - SMSF assets can be illiquid (e.g. commercial property) • Current practise isn’t perfect 10

Guarantee cashflow Chance of needing to use capital to fund cashflow • Current strategy: $1 million SMSF with balanced portfolio of assets • Drawing $50,000 per annum over a seven year period • SMSF cashflow strategy: secure income with RCV0 fixed term annuity 11

Free up capital for long term growth • Retirement is a long time - 65 year old male expected to live further 22 years, female 24 years 1 • Long time horizon presents opportunities to achieve higher returns • Secure cashflow with minimum amount of capital to maximise capital for growth Allocation to an RCV0 fixed term annuity to secure cashflow 2 : • Age Minimum pension 6 year term 7 year term 8 year term 9 year term 10 year term Under 65 4% 23% 27% 30% 34% 37% 65-74 5% 29% 33% 38% 42% 46% 75-79 6% 34% 40% 45% 51% 56% • Trustee and advisor can focus on investing to grow the SMSF balance 1. Based on ALT 2010-12 with 25 year improvements for a 65 year old male and female at 1 July 2017 2.Investment in a Challenger RCV0 Guaranteed Annuity, full inflation protection, no fees, payment amount equal to the minimum pension drawdown in year one, based on rates as at 14 July 2017. 12

Maximise upside while controlling risk • Risk and return trade off • Trade off between long term growth and short term cashflow requirements - Want to invest assets to maximise SMSF balance - Need to ensure cashflow met now and in the future • Measure of success across a range of possible outcomes - Increase in SMSF balance at the end of the term - No increase in downside risk 13

Key points to remember • Aligns need of cashflow and long term growth - Reduced exposure to sequencing risk • Disciplined approach to investing - Secure cashflow - Invest in growth • Maximising upside and controlling risk 14

Case study www.accurium.com.au P | 1800 203 123

Case study: Janet and Scott’s SMSF • Janet and Scott both aged 65 • SMSF balance of $1 million • Balanced asset mix • Cashflow requirement of $50,000 p.a. • Secure 7 years of income 16

Case study Comparing strategies using a 7yr RCV0 annuity Current New 17

Case study Chance of needing to draw on capital • Examine 3,000 market scenarios • Current strategy - capital required in 88% of the years tested • Cashflow Strategy immunised cash flow - capital required in 0% of years tested 18

Case study Free up capital for long term growth opportunities • Invest only 33% of fund assets to secure cash flow over 7 year term • Invest remaining $667,828 in the market (85% of which is in growth assets) • Re-balance growth portfolio over the term - Current overall strategy 50% growth, 50% defensive - New overall strategy at start 57% growth, 43% defensive 1.Fixed assumptions: CPI of 2.5%, Defensive: capital growth of 0% p.a., income of 3.4% p.a., Growth: capital growth of 2.1% p.a., income of 4.6% p.a., net of fees. 19

Case study Maximising upside potential and controlling downside risk • Analysing the SMSF balance at end of year 7 across 3,000 market scenarios 20

Illustrating the outcomes www.accurium.com.au P | 1800 203 123

Illustrating the outcomes Example: the conservative client • Kelly is a single retiree, aged 59 with $750,000 in a SMSF • Current plan is balanced investor with currently 60% invested in defensive assets and 40% in growth assets • Would like to invest to a little more into growth assets (up to 50%) • Worried the need to meet a minimum drawdown each year (currently 4%) may require her to draw down on some of her growth assets 22

Illustrating the outcomes Example: the conservative client • Kelly is a single retiree, aged 59 with $750,000 in a SMSF • Current plan is balanced investor with currently 60% invested in defensive assets and 40% in growth assets • Would like to invest to a little more into growth assets (up to 50%) • Worried the need to meet a minimum drawdown each year (currently 4%) may require her to draw down on some of her growth assets • Modelling the current scenario highlights a high chance she will need to spend capital 23

Illustrating the outcomes Creating a cashflow bucket • Guaranteed annuity will be an investment in the SMSF • Strategy focuses on a 6-10 year term • Regular payments returning interest and capital • Challenger Guaranteed Annuity - Fixed term - Residual Capital Value zero (RCV0) - Voluntary withdrawals allowed • Product guide highlights key features of fixed term annuity purchased by an SMSF 24

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Illustrating the strategic outcomes Personalised analysis • Challenger can provide an analysis of the SMSF cashflow strategy personalised to a client’s SMSF and financial goals - Examine effect of using different terms - Test new portfolio growth allocation to maximise SMSF balance and control risk - Examine impact of re-balancing or not • All outputs shown in case study are provided - Chance of spending capital - Fixed assumption SMSF balance forecast - SMSF balance at end of term at 3 risk measures 33