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

www.accurium.com.au www.challenger.com.au

SMSF cashflow strategy

Securing cashflow to generate long term growth

2

• 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

• bjectives and needs have NOT been considered in providing this advice. It is not appropriate for us to

provide personal advice in this forum.

Agenda

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

SMSF cashflow strategy

4

• 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

SMSF exposure to sequencing risk

5

• 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

How long is long enough?

6

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

Illustrating sequencing risk

7

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

8

SMSF cashflow strategy

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

Tying strategy to SMSF objectives

9

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

Implementing the cashflow strategy

10

• 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

Challenges in funding cashflow in an SMSF

Guarantee cashflow

11

• 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

Chance of needing to use capital to fund cashflow

Guarantee cashflow

12

• Retirement is a long time
• 65 year old male expected to live further 22 years, female 24 years1
• 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 cashflow2:
• Trustee and advisor can focus on investing to grow the SMSF balance

Free up capital for long term growth

• 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.

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%

13

• 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

Maximise upside while controlling risk

14

• 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

Key points to remember

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

Case study

16

• 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

Case study: Janet and Scott’s SMSF

17

Case study

Comparing strategies using a 7yr RCV0 annuity

New Current

18

Case study

• 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

Chance of needing to draw on capital

19

• 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

Free up capital for long term growth opportunities

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.

Case study

20

• Analysing the SMSF balance at end of year 7 across 3,000 market scenarios

Maximising upside potential and controlling downside risk

Case study

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

Illustrating the outcomes

22

• 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

Example: the conservative client

Illustrating the outcomes

23

• 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

Example: the conservative client

Illustrating the outcomes

24

• 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

Creating a cashflow bucket

Illustrating the outcomes

25

26

27

28

29

30

31

32

33

Personalised analysis

Illustrating the strategic outcomes

• 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

www.accurium.com.au Ph | 1800 203 123 www.challenger.com.au Ph | 02 9994 7000

The information in this presentation is provided by Accurium Pty Ltd ABN 13 009 492 219 (Accurium), a wholly-owned company of Challenger Limited ABN 85 106 842 371. Any financial product advice is general advice and is provided by Challenger Retirement and Investment Services Limited ABN 80 115 534 453, AFSL 295642 (CRISL) and Challenger Life Company Limited ABN 44 072 486 938, AFSL 234670 (CLC). It is intended for financial advisers only and must not be passed on to retail investors. It is also general information, not financial product advice, and has been prepared without taking into account any particular person’s circumstances. Where investment strategies and financial products are discussed, they are used for illustrative purposes only. Any statements of opinion, forward looking statements, forecasts or predictions (which are based on current expectations about future events and results) are subject to change and actual results may be materially different from those shown. This is because actual outcomes may be affected by known or unknown risks and uncertainties that are not able to be presently identified. Any taxation, Centrelink and Department of Veterans’ Affairs (DVA) information and illustrations are based on current law at the time of writing which may change at a future date. Challenger is not licensed or authorised to provide tax, social security or DVA advice and we strongly recommend that the relevant professional advice for individual circumstances be sought about these matters. Neither Challenger nor their related entities, nor any of their directors, employees or agents accept any liability for any loss or damage arising out of the use of all or part or, or any omission, inadequacy or inaccuracy in, the information presented.

• Contact us with any questions or comments
• CPD certificates will be issued soon
• Keep an eye out for our September webinar on commuting defined benefit pensions