Trustees must keep in mind that the sole purpose of an SMSF is to secure its members’ retirement benefits. This is why SMSF trustees have many factors to consider before implementing an investment strategy for all its members.
Trustees must consider the following factors to formulate an appropriate strategy:
Personal circumstance of members
More often than not, a person’s appetite for risk depends on their age, financial history, current source of income, and goals for the future, among others.
For instance, a person with dependants or is close to retirement may wish to play it safe with low-risk investments, such as mutual funds and bonds, to ensure the safety of their retirement or death benefit.
Some investors who are willing to accept risks for high returns on investments may prefer medium to high-risk investments, such as company stocks.
There are also people who prefer a 50-50 approach to ensure both financial growth and safety.
Costs of managing an SMSF
Managing an SMSF takes a lot of time and costs a lot of money. This is why trustees must keep some of their assets liquid to pay for annual and unexpected expenses.
Some expenses to prepare for are:
- Start-up cost
- Annual operational costs
- Professional fees
- Early access and accompanying taxes
Annual SMSF expenses can run between $500 and $2,000 but could increase if they hire professionals to do some of the necessary SMSF work, such as auditing and filing the tax return.
Diversity of assets and investments
Trustees should consider the types of investment assets to allocate in their portfolio depending on their growth or liquidity. A properly diversified set of investments is ideal.
A diverse group of trustees with different goals may consider investing in mutual funds, bonds, stocks and properties that could increase in value over time.
Trustees may also manage a business through their SMSF, however, business activities are accompanied by other costs and taxes.
Realistic objectives and expectations
Stay grounded and realistic no matter how well SMSF investments perform in the market. Don’t count your chickens before the eggs hatch.
Before settling on an investment strategy and during annual reviews, trustees should consider the fund’s ability to pay benefits and other costs if a member’s circumstance changes. The trust or each trustee may be penalised if the SMSF is unable to meet its obligations to members.
Prepare an exit strategy
It is best for trustees to prepare an exit strategy for investments plans in case circumstances change because any change in membership could affect the whole fund. Without an exit strategy, the trust may breach regulations.
SMSF investment strategies should take all the members’ ages, circumstances (financial or otherwise), and preferred payout method into consideration. Trustees should also consider that circumstances wherein a member may need financial assistance or leave could transpire.
This information has been sourced from the Australian Taxation Office and Nest Egg.