Retirement planning is all about cash flow
- The safe withdrawal rate strategy is popular with retirees in the US and other jurisdictions who often refer to the ‘4% rule’, that is you can comfortably withdraw 4% a year to fund income needs for life. However, Australia’s means tested Age Pension provides uneven cashflows for most SMSF retirees as they age and therefore invalidates the use of a simple rule of thumb for all but the very wealthy. A more holistic approach is to consider the total mix of income sources, rather than focus on a ‘safe’ withdrawal rate. The percentage of assets that retirees can afford to spend each year depends on their level of wealth.
- An income bucketing approach secures a level of cashflow over an initial period allowing a greater allocation to growth assets for the remainder of the portfolio. Our research shows that this can increase SMSF balances for typical SMSF retirees after 10 years across a wide range of scenarios compared to a balanced portfolio.
- A safety first, or income layering, approach locks in a retiree’s essential spending needs for life with secure income sources like lifetime annuities. Discretionary spending is then met with structures that can provide allocation to growth assets.
- Our research shows that the Age Pension means tests can add to the complexity of retirement planning, so it’s all the more important for SMSF trustees, particularly with higher wealth, to seek advice.