Joe and Tina Setting up a secure retirement income

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1 Joe and Tina Setting up a secure retirement income Clients Joe and Tina Age 65 and retiring Assets $400,000 superannuation in Joe s name 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. Joe and Tina are 65 years old and retiring. Joe is a store manager and Tina is a stay-at-home mum. They have $400,000 in superannuation, all in Joe s name. They own their home and have $20,000 in personal assets. They have no other financial assets or debts. Joe and Tina estimate they ll need minimum income of $38,000 per annum to meet basic living expenses in retirement. However, they prefer a more comfortable retirement and believe they would need approximately $58,000 per annum to achieve that. 1 Based on Centrelink rates and thresholds as at 20 March The maximum rate of Age Pension for a couple combined is $34, per annum. 2 Source: Life Expectancy Tables from Australian Government Actuary They also would like to spend $5,000 per annum over the next ten years on travel. Joe and Tina will receive some secure income from the Age Pension. This is currently $29,241 1 per annum based on their current level of assets. Over time, they expect their pension entitlement to approach the maximum rate 1 as they draw down on their assets to fund their retirement. However, this is still $3,748 per annum below their basic needs (in today s dollars). Joe and Tina s life expectancies are and years respectively 2. 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.

2 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 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 Challenger lifetime annuity will cost $74,959 and will provide them with an income of $3,748 3 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. 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). This will cost $46,652 and lock in income of $5,000 per annum for ten years, allowing Joe and Tina to fund their planned travels. Their adviser also recommends that they set up an account-based pension with Joe s remaining superannuation balance of $278,389. 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 $20,011 from their account-based pension in year one. 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% defensive 4. 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 $28,759 income for Joe and Tina in the first year of retirement. With their Age Pension payments of $29,241 on top, Joe and Tina have a total income of $58,000 in that first year (Figure 2). After speaking to their adviser, Joe s $400,000 superannuation balance is invested so that during the first year of retirement: a $74,959 Challenger lifetime annuity gives them $3,748 3 a $46,652 Challenger 10 year term annuity gives them $5,000 3 a $278,389 account-based pension gives them $20,011 they receive $29,241 from the Age Pension 5. Total income during the first year of their retirement is $58, Based on applicable Challenger annuity rates for Joe as at 8 April 2016 and assumes no adviser fees. Income is paid monthly indexed to inflation for the term annuity and partially indexed to inflation for the lifetime annuity (regular income). Joe and Tina have also selected a withdrawal guarantee of 50% for death where it occurs within the withdrawal period. Challenger annuity rates are subject to change. 4 The annuities form part of the defensive portion of the portfolio. 5 Based on Centrelink rates and thresholds as at 20 March Challenger Case study

3 Figure 1: Matching income to help Joe and Tina meet their goals over time Peak spending years for desirables Term annuity Account-based pension Lifetime annuity 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 for desirables Term annuity $5,000 Account-based pension $20,011 For things like: holidays meals out entertainment home repairs other unforeseen costs emergencies for essentials Lifetime annuity $3,748 Age Pension $29,241 Total income of $58,000 For things like: food clothing utilities health expenses 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. Challenger Challenger Publication Case Name study 5

4 Strategy considerations By investing in a combination of a Challenger lifetime annuity, Challenger term annuity and account-based pension, Joe and Tina have: A safe and dependable income stream from the Challenger lifetime annuity that, in addition to their Age Pension entitlement, can 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 holidays. Market-linked 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

5 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. 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 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. To find out more about your retirement income options, including whether an annuity might be suitable for you, talk to your financial adviser, visit or call the Challenger Investor Services team on Challenger Case study

6 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 8 April 2016 unless otherwise specified and is provided by Challenger Life Company Limited ABN , AFSL and Challenger Retirement and Investment Services Limited ABN , AFSL (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 or by contacting our Investor Services Team on 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. Challenger Limited Level 2 5 Martin Place Sydney NSW 2000 Telephone Facsimile /CG828/0316