The SMSF Cashflow Strategy addresses three key goals SMSF retirees are looking to achieve when investing the assets of their fund:
Long term growth opportunities, and
Controlling downside risk.
Sequencing risk is introduced when one pool of assets is used to fund the competing objectives of long-term growth and short-term cashflow. A cashflow strategy would segment capital for generating cashflow, and capital for growth investing. This can help an SMSF retiree achieve their goals should an adverse market event occur in retirement.
The SMSF would secure required cashflow over a desired term using a capital efficient income product such as an RCV0 fixed term annuity. The remaining capital is then invested to maximise SMSF balances over the term, protected from sequencing risk.
Get a free analysis of your client’s exposure to sequencing risk
Challenger’s SMSF Cashflow Illustrator has been designed to stress test a client’s investment strategy. Unlike traditional models of retirement the SMSF balance is projected across 3,000 future market scenarios in order to analyse the range of outcomes for the SMSF balance under their current strategy and the cashflow strategy. This allows analysis of the sequencing risk faced by the SMSF based a number of risk measures including:
median SMSF balance at the end of the term (the outcome we might expect for the SMSF balance 50% of the time)
SMSF balance should a significant adverse event be experienced (outcome at the bottom 5th percentile)
You can view an example of this analysis in our case study, and get a free analysis for your clients by completing the interactive form.
How sequencing risk impacts your client’s SMSF balance Sequencing risk is the risk that the order and timing of clients’ investment returns is unfavourable, resulting in less money for retirement. Sequencing risk is greatest at or near
retirement as this is when a client’s portfolio is usually at its highest. Any negative returns at this time can have a large impact because once capital is drawn down it is difficult to recover in the retirement phase. Whilst in many cases sequencing risk cannot be avoided, there are strategies available which can reduce the impact and support a client in achieving their retirement goals. For SMSF retirees a cashflow strategy can be used to manage sequencing risk in the SMSF.