Planning for your clients in retirement

4 September 2020
| By Industry |
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Fact: retiree clients play a substantial role in self-managed superannuation fund (SMSF) planners’ practice, typically comprising over half of their total SMSF client base, according to the annual Vanguard/Investment Trends 2020 SMSF report. 

Also another fact – retirees are one of the most impacted groups in today’s low yield and high volatility investing environment. 

With those two facts in mind, this report offers some interesting insights into this challenging task faced by today’s advisers, taking a deep dive into how SMSF planners are working with retirees with self-managed funds and the most popular strategies employed to assist investors in this sector.

One of the key findings of the report was that SMSF planners are seeing longevity risk and generating sufficient income as their primary challenges when servicing their retiree clients – correlating with the challenging investment environment they are operating in. 

A vast majority (73%) of these advisers, felt there is a lack of suitable products in the Australian marketplace to assist with these issues. 

So how are advisers preparing their SMSF retirees for their drawdown years? 


One of the critical tasks for an adviser with retiree clients, is advising on their draw down strategy, helping to ensure the money doesn’t run out too soon.  

The average age of retirees in this research was 69, with average accumulated assets of $1.8 million, and an average pre-tax drawdown amount of $70,000 per annum. 

It was no surprise the research reported that when determining a draw down strategy for their SMSF retiree clients, a planner’s primary consideration typically starts with their client’s lifestyle, with 70% of advisers reporting they review what their client needs to maintain their lifestyle. 

Also taken into account widely is the minimum compulsory rate the client has to draw out due to SMSF rules – with 57% of planners factoring this in. 

There were two drawdown methods which the majority of advisers employ. The most popular, employed by just over half of advisers surveyed, was the bucket approach. 

This was described as splitting assets into long term and short-term buckets. Some 53% of advisers used this method with retired clients.

The ‘income from investments’ approach was advised by 39% of advisers with retiree SMSF clients, described as using income from their investments to cover withdrawals. 

This strategy suggests that, by only spending the income that has been paid out, the underlying assets are not touched, which means that the strategy should last forever, or at the very least, outlast your retirement.

However an income strategy, in particular in the current low yield investment environment, can lead to an alteration of the risk profile of the investor’s portfolio, due to the equity heavy exposure needed to yield enough income to suit investor lifestyles.

In fact, Vanguard research suggests while back in 2013 an investor following the 4% spending rule could have used a diversified portfolio of 50% equities and 50% bonds to get that 4% yield.

Today that investor would have had to shift their allocation to 100% equities to get the same yield and so the risk has almost doubled.

An alternative method – the total return approach coupled with a dynamic spending strategy

So how can advisers implement a retirement income strategy that will support a client’s lifestyle but not create an over-reliance on income such as dividends? 

This is where the total-return approach – a strategy that looks at all sources of return from your portfolio, both income and capital – comes in handy. 

This approach first assesses an individual or household’s goals and risk tolerance, and sets the asset allocation at a level that can sustainably support the spending required to meet those goals.

Unlike an income-oriented strategy which generally utilises returns as income and preserves capital, the total-return approach encourages the use of capital returns when necessary. 

So, during periods where the income yield of a portfolio falls below an investor’s spending needs, the capital value of the portfolio can be spent to make up the shortfall. 

As long as the total return drawn from the portfolio doesn’t exceed the sustainable spending rate over the long term, this approach can smooth out spending during the volatile periods for markets which inevitably occur. 

This approach can also require the discipline to reinvest a portion of the income yield during periods where the income generated by the portfolio is higher than the sustainable spending rate – something that can require the valuable guidance provided by an adviser.

And while capital returns – best represented by the price movement of shares – can be a volatile component of this strategy, taking a long-term view is paramount.

A total return approach separates the spending strategy from the portfolio strategy and can allow for better diversification of risk across countries, sectors and securities.

The other strategy that planners can employ alongside the total return approach for their clients, is addressing a client’s expenditure through the use of a strategy termed the ‘dynamic spending strategy’. 

Vanguard combined the two most commonly used approaches to spending – the “dollar plus inflation” rule and the “percentage of portfolio” rule – to find a middle ground.

The dynamic spending strategy resolves the portfolio viability risk aspect of the former and addresses the latter’s requirement to regularly adjust one’s rate of expenditure. 

This strategy sets a maximum and a minimum percentage withdrawal limit for annual expenditure based on the performance of the markets and an investor’s unique goals. As a result, it allows for annual spending to adjust according to market performance while concurrently moderating fluctuations from year-to-year. 

This means that those who are willing to be flexible in their spending – reducing expenditure in negative return years and spending more in positive return years – materially increases their chances of the portfolio lasting the period of their retirement in comparison to the dollar plus inflation rule, and also lessen the large fluctuations in expenditure that would result from the percentage of portfolio rule. 

Vanguard investigated the results that would come from capping spending increases at 5% of the prior year’s income each year – even if a portfolio grows faster than that, and setting the floor at 2.5% irrespective of the extent of a market correction.

The calculations are as follows:

Take for instance an investor who determined that a sustainable spending rate of 4% was appropriate and spent $40,000 from a $1 million portfolio in year one. 

If in the following year, market returns were positive and the balance is now $1.1 million, a maximum of $42,000 would be spent (an increase of 5% on the prior year’s $40,000 withdrawal). 

Without the 5% ceiling, $44,000 would have been drawn (4% of $1.1 million). In a poor year, they should cut spending to the floor of $39,000 ($40,000 less 2.5%) but no more. 

Applying the ‘cap and floor’ approach to calculate each year’s of a client’s spending can reduce the variability in retirement income while balancing the likelihood that an investment portfolio can last the distance required.

Moving a client’s investment strategy to a total-return approach allows for the separation of an investment strategy from their spending strategy and enables a planner to help a retiree client better tailor their spending strategy to their retirement goals. This, alongside staying the course and taking the longer-term view instead of focusing on the current market volatility, can help ride out this health pandemic with more confidence. 


Finally, the Vanguard/Investment Trends SMSF report showed that 70% of planners are confident their SMSF retiree clients will not require the Age Pension in the future, particularly those who are under 65 years old.

Of their clients still in accumulation phase, advisers felt that some 79% were on track to achieving their retirement goals.
Some 84% of advisers reported their retiree clients were drawing down in a sustainable manner. 

Of the remaining 16% the most popular advice provided to these clients in order to correct this was to review their budget, expenses and spending habits, downside their home and explore the Age Pension entitlements, to return to paid employment and to use higher income generating investments. 

Aidan Geysen is head of investment strategy at Vanguard Australia.

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