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Goals-based approach key to retirement

The challenge of ensuring sustainable retirement income has become more top of mind for SMSF advisers and trustees amid greater acknowledgement of sequencing risk and client goals, a finance academic has said.

“For SMSF investors, goals and outcomes are critically important,” Griffith University professor of finance and Drew, Walk & Co partner Michael Drew told selfmanagedsuper.

“The challenge before trustees of SMSFs is to meet some, at times, almost conflicting goals of income requirement, liquidity and then a part of that portfolio driving a real rate of return to ensure the sustainability of retirement income.

“From a goals-based perspective, these things are absolutely live for the SMSF sector.”

Drew said SMSF investors instead “lived through” sequencing risk after experiencing events including the dotcom bubble, the sub-prime crisis, the global financial crisis and currently the sovereign debt crisis.

“What’s been fascinating is that for many SMSF investors, sequencing risk is not a theoretical textbook construct – this is a generation of investors who have had major events occur in the last decade of their investing life so SMSF investors are acutely aware of sequencing risk and path dependency,” he said.

“The challenge is now as they enter retirement, how do they frame those goals and what is the right asset allocation to meet income requirements in the short term with some maybe unknown timing of aged-care and medical care costs, and of course, the spectre of inflation eating into their real income levels?

“They’re the touchstone issues at the moment, in terms of how SMSF trustees are thinking about the problem.”

Last July, he said sequencing risk was still not fully comprehended by financial advisers, while greater importance was placed on the rate of return.

“When you consider the recent data suggesting that SMSFs can have around two-thirds growth assets and one-third defensive assets – in effect, similar to the default option of many Australian Prudential Regulation Authority funds – then there is a genuine risk of SMSF trustees falling foul of sequencing because of their asset allocation decisions,” he said at the time.

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