Download Setting up a secure retirement income

Joe and
Tina
Setting up a secure
retirement income
Clients Joe and Tina
Age
65 and retiring
Assets$450,000 superannuation in
Joe’s name and $50,000 cash
Goals To always have money to pay
for basic costs of living, have enough
income to live comfortably, make sure
their savings last the rest of their lives
and protect against share market risk.
J oe and Tina are 65 years old and retiring.
Joe is a store manager and Tina is a
stay-at-home mum. They have $450,000
in superannuation, all in Joe’s name.
They own their home and have $20,000
in personal assets. They have $50,000 in
the bank as a cash reserve and no debts.
Joe and Tina estimate they’ll need
minimum income of $39,000 per annum
to meet basic living expenses in retirement.
However, they prefer a more comfortable
retirement and believe they would need
approximately $60,000 per annum
to achieve that. This includes $6,000 per
annum over the next ten years on travel.
1 Based on 1 January 2017 higher Assets Test threshold and taper rate.
2 The maximum rate of Age Pension for a couple combined is
$34,382.40 per annum.
3 Source: 2010-2012 Life Expectancy Tables from Australian Government
Actuary www.aga.gov.au
Joe and Tina will receive some secure income from the
Age Pension. This is $23,0721 per annum based on their
current level of assets.
Over time, they expect their pension entitlement to approach
the maximum rate2 as they draw down on their assets to
fund their retirement. However, this is still $4,618 per annum
below their basic needs (in today’s dollars).
Joe and Tina’s life expectancies are 19.22 and 22.05
years respectively3. This is an average only – they are in
good health, so could expect to live well past 90. Like many
Australians, Joe and Tina fear that they will outlive their
savings and are worried they won’t be able to afford their
basic expenses once their savings have run out. Joe and Tina
would therefore like to find an additional source of secure
income to cover the difference between their basic expenses
and the maximum rate of Age Pension.
Joe and Tina are also concerned about share market volatility
and therefore prefer only a moderate exposure to growth
assets (50% in growth assets, 50% in defensive assets).
They visit their financial adviser to find a solution.
Challenger
Setting up a secure
retirement income
The financial adviser’s
recommendation
Joe and Tina’s financial adviser
recommends that they convert their
superannuation into a combination
of income streams.
This strategy is designed to give Joe
and Tina not only their preferred level
of income, but also the flexibility and
certainty that they desire.
The first recommended income stream is a Challenger
lifetime annuity. A Challenger lifetime annuity is a secure
investment that can provide a series of regular payments
for the rest of their lives.
The account-based pension will be invested in a mix of
72% growth and 28% defensive assets to meet Joe and
Tina’s preferred overall asset allocation of 50% growth,
50% defensive6. The account-based pension is designed to
provide them with an income stream that helps give them
the lifestyle they desire until it runs out.
With this strategy, Joe and Tina are matching income from
different sources to different expenses. The secure income
from the Age Pension and the lifetime annuity provides
them with an income floor which can pay for their basic
living expenses during their lifetime. The term annuity pays
for their planned travels for a set number of years while the
account-based pension helps them achieve their desired
lifestyle until the capital runs out (Figure 1).
The income streams, when totalled, provide $36,928 income
for Joe and Tina in the first year of retirement. With their Age
Pension payments of $23,0727 on top, Joe and Tina have a
total income of $60,000 in that first year (Figure 2).
The Challenger lifetime annuity (flexible income option)
will cost $81,110 and will provide them with an income of
$4,6184 per annum. This secure source of income will help
them meet their basic living expenses even if they spend the
remaining balance of their savings in the future.
After speaking to their adviser, Joe’s $450,000
superannuation balance is invested so that during
the first year of retirement:
The next recommended income stream is a ten year
Challenger term annuity with no remaining capital
at the end of the term. A Challenger term annuity can
provide regular, known payments for a fixed period of time
(assuming Joe and Tina don’t withdraw early).
• a $56,669 Challenger 10 year term annuity gives
them $6,0005
This will cost $56,669 and lock in income of $6,000 per
annum for ten years, allowing Joe and Tina to fund their
planned travels.
T otal income during the first year of their retirement
is $60,000.
5
• a $81,110 Challenger lifetime annuity gives them
$4,6184
• a $312,221 account-based pension gives them
$26,310
• they receive $23,072 from the Age Pension7.
Their adviser also recommends that they set up
an account-based pension with Joe’s remaining
superannuation balance of $312,221. With an
account-based pension they can choose from a range
of investments and select the income they draw, subject
to minimum payment requirements.
Their adviser recommends that they draw $26,310 from
their account-based pension in year one.
Challenger Case study
4 Based on a Challenger Guaranteed Annuity (Liquid Lifetime) quote as
at 20 September 2016 for Joe. The quote assumes the flexible income
option with a withdrawal period of 19 years, no adviser fees and regular
payments are paid monthly indexed partially to inflation.
5 Based on a Challenger Guaranteed Annuity quote as at 20 September
2016 for Joe. The quote assumes a 10-year term annuity with no residual
capital value, no adviser fees and income paid monthly indexed to inflation.
6 Based on the annuities forming part of the defensive portion of
the portfolio.
7 Based on 1 January 2017 higher Assets Test threshold and taper rate.
Figure 1: Matching income to help Joe and Tina meet their goals over time
Peak spending years
Term annuity
Income to pay
for desirables
Account-based pension
Lifetime annuity
Income to pay
for essentials
Age Pension
65
Age
This diagram is illustrative only and not to scale. It is not a prediction or guarantee of any particular outcome.
Figure 2: First year’s income from different sources can be matched to different expenses
Term
annuity
$6,000
Income to pay
for desirables
Account-based
pension $26,310
Lifetime annuity $4,618
Income to pay
for essentials
Age Pension $23,072
For things like:
• holidays
• meals out
• entertainment
• home repairs
• other unforeseen costs
• emergencies
For things like:
• food
• clothing
• utilities
• health expenses
Total income of $60,000
Part of Joe and Tina’s basic expenses are funded from the account-based pension until their Age Pension increases to the maximum rate. This diagram is
illustrative only and not to scale. It is not a prediction or guarantee of any particular outcome.
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Strategy considerations
By investing in a combination of a Challenger lifetime
annuity, Challenger term annuity and an account-based
pension, Joe and Tina have:
• A safe and guaranteed income stream from the Challenger
lifetime annuity that, in addition to their Age Pension
entitlement, can help cover basic expenses for the rest of
their lives and provide some protection against share
market risk.
• An additional amount of income for ten years from the
Challenger term annuity to pay for planned holidays.
• Variable income from the account-based pension
designed to pay for the ‘nice to haves’ and maintain
some flexibility.
• Exposure to the share market through the account-based
pension.
• Some inflation protection from the Age Pension and
Challenger annuities.
• Further potential to increase their Age Pension, as the
Challenger lifetime annuity and Challenger term annuity
have a reducing asset value under the current Centrelink
Assets Test.
Challenger Case study
The value of advice
Your financial adviser can help you think about:
• your budget in retirement, including how to identify
essential costs and desirable costs
• how to structure your investments so that you’ll have
secure income to pay for the essentials and other income
for a comfortable lifestyle
• whether you can improve your social security entitlements
by using different investments.
Each person’s situation is different and all investments and
investment strategies carry some risk. The appropriate level
of risk for you will depend on factors such as your age,
financial goals, investment timeframe, where other parts
of your wealth are invested, and your risk tolerance. Your
financial adviser can also help you think about these things.
People seeking the following may wish
to talk to their adviser about an income
layering investment strategy:
• a regular, dependable income that
lasts the rest of their lives
• to minimise the impact of inflation
• flexibility to access a lump sum
amount during retirement
• to have a high degree of certainty
around some of their goals.
Some of the matters you may wish to talk to your financial
adviser about include the risk of locking up your money for
an extended period of time, potentially receiving less back
than the amount originally invested if you withdraw during
any withdrawal period, possibly affecting your social security
benefits, the risk of inflation and the ability of the provider to
meet the promised payments.
The risks for the Challenger lifetime annuity and
the Challenger term annuity are also covered in the
product disclosure statement for each product, which
can be obtained from your financial adviser or at
www.challenger.com.au.
To find out more about your retirement income options,
including whether an annuity might be suitable for you,
talk to your financial adviser, visit www.challenger.com.au
or call the Challenger Investor Services team on 13 35 66.
Challenger Case study
Adviser contact details
This case study relates to a hypothetical couple, Joe and Tina, and is provided for illustrative purposes only.
This case study is not intended to reflect any particular person’s circumstances. It is based on information
that is current as at 20 September 2016 unless otherwise specified and is provided by Challenger Life
Company Limited ABN 44 072 486 938, AFSL 234670 and Challenger Retirement and Investment
Services Limited ABN 80 115 534 453, AFSL 295642 (together referred to as Challenger), the issuer of
the Challenger Guaranteed Annuity (Liquid Lifetime) and the Challenger Guaranteed Annuity (collectively
referred to as the Annuities). It is intended to be general information only and not financial product
advice and has been prepared without taking into account any person’s objectives, financial situation or
needs. Each person should, therefore, consider its appropriateness having regard to these matters and the
information in the product disclosure statement (PDS) for the Annuity before deciding whether to acquire
or continue to hold an Annuity. A copy of the applicable PDS is available at www.challenger.com.au or
by contacting our Investor Services Team on 13 35 66. This case study includes statements of opinion,
forward looking statements, forecasts or predictions based on current expectations about future events
and results (see, for example, Figure 1). Actual results may be materially different from those shown. This
is because outcomes reflect the assumptions made and may be affected by known or unknown risks
and uncertainties that are not able to be presently identified. Neither Challenger nor its related bodies
corporate nor any of their employees receive any specific remuneration for any advice provided in respect
of the annuities. However, financial advisers may receive fees if they provide advice to you or arrange
for a person to invest in an Annuity. Some or all of Challenger group companies and their directors may
benefit from fees and other benefits received by another group company. Any taxation, Centrelink and/or
Department of Veterans’ Affairs illustrations are based on current law at the time of writing which may
change at a future date. Challenger is not licensed or authorised to provide tax or social security advice.
We strongly recommend that prospective investors seek financial product advice as well as professional
taxation and social security advice in relation to their individual circumstances.
www.challenger.com.au
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Sydney NSW 2000
Telephone 02 9994 7000
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