Reference no: EM132627070

Background

John and Ella are married. John is 65 and Ella is 60. They have both just retired. They have $1,200,000 funds in a combination of superannuation and non-superannuation investments (excluding their home).

They own their home which they intend to continue living in throughout their retirement years. They do not have any debt. They plan to spend $75,000 p.a. in retirement and do not have any further planned annual or lump sum expenses.

They have two daughters to whom they would like to eventually leave their home and remaining investment assets upon their deaths.

John and Ella are able to tolerate some investment fluctuations, although they would be very concerned if their investments fell by 40% in any year. Throughout most of their working life, they invested their funds in growth investment options comprising 25% defensive investments (cash and fixed interest) and 75% in growth investments (shares and property). However, they want to change their asset allocation now that they are both retired.

John and Ella are both healthy and they are each expected to live approximately 20-25 more years.

QUESTION

Explain as though you are their financial adviser, how John and Ella will be able to finance their cost of living requirements in the event that the value of their investment drops by 25% in a single year?