Trustees of a fund came to discuss how ‘retirement ready’ they were. This is a common question as people approach retirement.
My first question was to ask what level of income they need in retirement. They had no idea, so we did a review of their expenses now and what they expected them to be, including allowances for house renovations and some overseas travel.
As retirement is still a few years away, we agreed a target date to work towards to determine if their current plans would provide the assets to generate the income we expected they would require.
We looked at the current investment portfolio and discussed their tolerances to risk and their return expectations.
A review of their current investment portfolio showed that there was a single large asset in the fund. The investment strategy was more than 5 years old and did not mention any asset classes, allocations across them nor recognise that this was a single asset fund. A new strategy was prepared that rectified these issues.
We determined together their optimal asset allocation strategy.
Having determined the costs of the fund and income and the level of contributions to be deposited into the fund between now and retirement; we were able to model their expected income in retirement allowing for their expenditure plans. This gave them a picture as to how long their funds would last based on the asset portfolio.
However as a single asset portfolio, it became quite evident that this asset would not generate sufficient long-term income to ensure that they were able to draw the minimum required to meet their pension obligations. A more liquid portfolio would be required.
We then reviewed the approach to creating a more liquid portfolio over time that allowed them to keep their current asset, while diversifying across asset classes to reduce their market risk, concentration risk and liquidity risk.
This gave them the confidence to know how their retirement plans are currently placed. With a few years to retirement, there was time to make the changes they needed.
At the meeting to review their cash flows, we were also able to enter changes to the initial assumptions, such as if we spend more here or incur this one off cost there and how this would that impact their retirement plans.
We also reviewed the trust deed of the fund. As it was the original deed from 2008, we advised that the trustees update their deed to reflect the large number of changes that have occurred since then.
When in the pre retirement stage, it is highly recommended to complete a review of your SMSF and planned lifestyle in retirement to ensure you can retire with confidence. If you’re within 5 years of retirement, now is the time to model your cash flow and ensure your SMSF is optimised for you.