Improving confidence and portfolio outcomes in retirement – a practical case study

It is widely accepted that an allocation to a lifetime income stream can help many clients maximise Age Pension entitlements, improve the confidence of meeting their spending goals and manage longevity risk in retirement. Perhaps less widely known is that a partial allocation to a lifetime income stream, even for those with significant assets, can also help improve total portfolio and estate outcomes. 

In this month’s article, we introduce retirees Charlotte and Collin and explore how a partial allocation of their portfolio into a lifetime income stream can help improve the likelihood of them achieving their spending goals as well as improve their portfolio and estate outcomes.

Charlotte and Collin

Age: Both age 62 

Assets: Homeowners, $1,000,000 each in superannuation (50/50 growth defensive), $100,000 cash/term deposits and $50,000 non-financial assets 

Goals: To spend comfortably, but confidently, through retirement

Charlotte and Collin have recently sold their business. Their once-small labour hire business had gone from strength to strength over recent years. A convincing buy-out from a competitor has set Charlotte and Collin up nicely for retirement and earlier than they anticipated. With appropriate planning Charlotte and Collin find themselves in a position where much of their retirement savings are now held via superannuation allowing them to structure tax effective retirement income streams. 

In Charlotte and Collin’s own words, they want to be able to spend “comfortably, but confidently” through retirement. In other words, they want to be able to spend as much as they can to enjoy their retirement to the fullest but also ensure that level of spending is sustainable. Ultimately, they want to understand how much they can afford to spend throughout their retirement based on the savings they have built. They are happy that their current home is where they would like to live for most, or all, of their retirement. 

They are keen to help out their kids and grandkids from time to time and will do this from their retirement income rather than the capital from their retirement savings. They would like to leave their kids a significant benefit following their eventual deaths (hopefully many decades into the future) and believe that their current home will be sufficient for this purpose.

Comfortable as well as confident retirement spending 

Charlotte and Collin’s challenge to their financial planner was to develop a retirement drawdown strategy that lets them draw the highest retirement income possible each year, so they can enjoy their retirement to the fullest, and with a suitably high level of confidence or probability that this level of income could continue to be achieved through a long retirement. 

Using Challenger’s Retirement illustrator (accessible to all financial planners via Challenger’s AdviserOnline portal), their financial planner has tested a range of retirement income drawdowns based on them investing their superannuation savings in an account-based pension with a 50/50 growth defensive asset allocation. The table below summarises the financial planner’s findings:

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