Wednesday 19 April 2023

Adjusting retirement account DRP to slowly increase allocation to cash

Apart from a temporary change from the normal long-term asset allocation of our SMSF I made on Feb 6 2020 (going 'risk off') we tend to stick to our allocation of practically 100% invested in the Vanguard Diversified High Growth Fund and have all bi-annual distributions reinvested. However, DW had to start taking the minimum required annual withdrawal after retiring and moving her SMSF account into 'pension phase'(she later decided to do some part-time work, and eventually returned to full-time employment) so our SMSF has sometimes not had enough cash sitting in the ANZ V2 bank account to make required ATO tax payments on contributions and fund taxable income, and also make the required minimum pension payments to DW. DW and DS1 are both making SGL and SS contributions into the SMSF, but my super contributions all go into my employer super fund (as the fees are subsidized and I receive company-funded life and TPD insurance cover) although the bulk of my TSB is sitting in our SMSF.

So far we have solved this cashflow problem by making 'ad hoc' unit sales within the SMSF to provide sufficient cash when needed, but with the stock market seeming relatively high (see chart below) and a persistent risk of a global and/or local recession due to various factors (inflation and resulting higher interest rates, Russo-Ukraine war and potential expansion to involved other states, prospects of China invading Taiwan and triggering a regional conflict etc.) we have decided to rescind the DRP election and instead let future distributions be paid out as cash into our SMSF's V2 bank account. This will provide enough cash for DW's minimum 4% pension payment in July/August from the June fund distribution payment, and will then slowly move our asset allocation more towards cash when the Dec distribution payments occurs at the end of 2023.

When I turn 65 I will also be able to move my SMSF balance into 'pension phase' even if I don't stop work or change employers, which will reduce the income and CG taxes paid by our SMSF, but would require a significant amount of cash available each year to make the minimum pension payment. So we may move our SMSF back to DRP in future, but might stick with distributions being paid into the SMSF bank account for quite a while.

If the markets drop into an obvious 'bargain' range in future we can always make an ad hoc purchase of additional units using whatever 'spare' cash is sitting in the V2 bank account.

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1 comment:

Slack Investor said...

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