SMSF Cashflow Strategy Managing sequencing risk in an SMSF The inf ormation in this presentation is prov ided by Accurium Pty Ltd ABN 13 009 492 219 (Accurium), a wholly -owned company of Challenger Limited ABN 85 106 842 371. Any f inancial product adv ice is general adv ice and is prov ided by Challenger Retirement and Inv estment Serv ices Limited ABN 80 115 534 453, AFSL 295642 (CRISL) and Challenger Lif e Company Limited ABN 44 072 486 938, AFSL 234670 (CLC), the issuer of the Challenger Annuity (PDS av ailable f rom www.challenger.com.au). It is intended f or f inancial adv isers only and must not be passed on to retail inv estors. It is also general inf ormation, not f inancial product adv ice, and has been prepared without taking into account any particular person’s circumstances. Where inv estment strategies and f inancial products are discussed, they are used f or illustrativ e purposes only . Any statements of opinion, f orward looking statements, f orecasts or predictions (which are based on current expectations about f uture ev ents and results) are subject to change and actual results may be materially dif f erent f rom those shown. This is because actual outcomes may be af f ected by known or unknown risks and uncertainties that are not able to be presently identif ied. Any taxation, Centrelink and Department of Veterans’ Af f airs (DVA) inf ormation and illustrations are based on current law at the time of writing which may change at a f uture date. Challenger is not licensed or authorised to prov ide tax, social security or DVA adv ice and we strongly recommend that the relev ant prof essional adv ice f or indiv idual circumstances be sought about these matters. Neither Challenger nor their related entities, nor any of their directors, employ ees or agents accept any liability f or any loss or damage arising out of the use of all or part or, or any omission, inadequacy or inaccuracy in, the inf ormation presented. www.accurium.com.au www.challenger.com.au
Agenda • Market & sequencing risk • Sequencing risk faced by SMSFs • How to protect against downside risk • Case study of SMSF Cashflow Strategy • Q & A about the SMSF Cashflow Strategy in practice 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
Market and sequencing risk www.accurium.com.au P | 1800 203 123
Risks in retirement It’s more than market risk Outliving savings in retirement Possibility of negative returns at or near retirement affecting the market value of investments which cannot be fully recovered in the future Erosion of purchasing power over time Inflation risk 4
Market risk Equity return range narrows over time but losses can persist for up to 6 years Source: Challenger calculations on data from Morningstar and S&P?ASX200 The shaded area represents the range of outcomes for average annual returns based on consecutive periods betw een 1900 and 2017 for the period noted in the chart 5
Sequencing risk It’s in the timing Possibility of negative returns at or near retirement affecting the market value of investments which cannot be fully recovered in the future 6
Sequencing risk Doesn’t exist without cashflows No cashflow 600000 500000 400000 300000 200000 100000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Neg at start Neg at end Assumptions: $100,000 initial investment, no further investments or w ithdrawals, investments earn 6% p.a. (net of fees and taxes) in all years except first or last three years w hen investments earn -6% p.a. (net of fees and taxes), figures are nominal and are not adjusted for inflation. 7
Sequencing risk Can work for you in accumulation Cashflow in 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Neg at start Neg at end Assumptions: $100,000 initial investment, annual contribution of $5,000 p.a. at start of each year, investments earn 6% p.a. (net of fees and taxes) in all years except first or last three years w hen investments earn -6% p.a. (net of fees and taxes), figures are nominal and are not adjusted for inflation. 8
Sequencing risk Works against you in drawdown Cashflow out 180000 160000 140000 120000 100000 80000 60000 40000 20000 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Neg at start Neg at end Assumptions: $100,000 initial investment, annual w ithdrawal of $5,000 p.a. at start of each year, investments earn 6% p.a. (net of fees and taxes) in all years except first or last three years w hen investments earn -6% p.a. (net of fees and taxes), figures are nominal and are not adjusted for inflation. 9
Sequencing risk Actual and reversed returns $1,000,000 $900,000 $800,000 $700,000 Account balance $600,000 $500,000 $400,000 $300,000 Retiree A (actual returns and inflation from 1992 to 2017) $200,000 Retiree B (same returns and inflation, except in reverse $100,000 chronological order) $0 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 Years into retirement Source: Challenger estimates using ABS, S&P/ASX accumulation and Bloomberg AusBond indices . Assumes retiree draws ASFA comfortable standard of living for December 2016 $43,358 p.a. indexed to CPI each year. 10
Market risk Impact of a downturn at different times in pension phase A 60% equities and 40% fixed income portfolio – draw downs based on average over 140 years of US data aiming to exhaust balance after 20 years. Assumes fees of 1.5% per annum. Source: Challenger, Shiller 11
Sequencing risk faced by SMSFs www.accurium.com.au P | 1800 203 123
SMSF objectives in retirement • Meet minimum pension standards so can claim earnings as tax exempt • Maximise balances over retirement so you can – Afford a comfortable lifestyle ensuring assets last for life – Maximise estate benefit • Requires – Regular cashflow drawn from SMSF to meet desired spending & min pension – Investing for long term growth 13
Case study Scotty Family SMSF • Scott and Sandra Smith • SMSF balance of $1,600,000 • Currently invested in a balanced asset mix 1 • Require cashflow of $85,000 p.a. increasing annually with inflation • Looking to invest over the long term 1.Assumed asset mix of 25% Aus Shares, 25% Aus Listed Property, 25% Aus Bonds, 25% Cash. 14
Market Risk Scotty Family SMSF • Historic balanced asset mix real returns over different timeframes 1 • Need to secure cashflow for at least 6 years in order for growth opportunities to be realised, even in unlikely event of a downturn 1.Vanguard 2016 Index Chart, RBA G2 Consumer Price Index, data betw een 1984 and 2016. 15
Fixed assumptions Does not illustrate risk • Traditional forecasts might use fixed assumptions • Average real return on balanced asset mix over 20 year period 1997 to 2016 was 6.1% p.a. 16
Illustrating sequence risk Order and value of actual returns has a big impact • SMSF balance over retirement if Scotty Family SMSF experienced actual historic returns 1 between 1997 and 2016 1.Vanguard 2016 Index Chart, RBA G2 Consumer Price Index, data betw een 1997 and 2016 17
Allowing for sequence risk Order and timing of actual returns has a big impact • SMSF balance over retirement if Scotty Family SMSF experienced actual historic returns 1 between 1997 and 2016 Using average return showed just under $2m 1.Vanguard 2016 Index Chart, RBA G2 Consumer Price Index, data betw een 1997 and 2016 18
Stochastic models Allow for risk • A stochastic model involves the statistical analysis of the range of possible outcomes – Allows for returns to vary over time like in the real world – Thousands of simulations of likely scenarios to stress test the SMSF over retirement – Actuarial techniques to analyse the resulting distribution of SMSF outcomes • Challenger’s Cashflow Illustrator – Considers 3,000 future market scenarios for yields and capital growth on growth and defensive asset classes provided by Willis Towers Watson 19
Stochastic models Measuring risk • Market and sequencing risk measures: – How often did the SMSF have to draw on capital invested in the market to fund $85,000 p.a.? – What was the SMSF balance after 10 years in a ‘worst case’, bottom 5% of outcomes? – What was the SMSF balance after 10 years in the ‘median’ outcome, the middle outcome? • Instead of having one guess at an outcome using fixed assumptions look at the range of outcomes to understand risk! 20
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