Can baby boomers afford to retire?

As they prepare for retirement, the baby boomer generation continues to shape advice strategies and product development, writes Barry Wyatt.

It’s hard to believe, but I have just celebrated my 49th birthday.

That means I only have another 132 monthly pay cheques left to fund my retirement at 60, placing me at the back of the baby boomer demographic.

While it’s still some time before I take my bat and ball and head off to the financial services pavilion for the last time, my thoughts are already turning to ensuring I have sufficient funds to enjoy a retirement that promises to be long and active.

As the first baby boomers approach retirement, many of them will also be starting to think about how long their nest eggs will last. A growing number of people are moving from accumulating assets to unlocking capital that will fund their lifestyles.

The baby boomers’ march towards retirement represents a huge opportunity and challenge for financial planners, advisers and product providers to effectively engage this segment of clients.

Baby boomers – the architects of advice

Baby boomers have played a major role in shaping advice strategies and product development over the past three decades.

It’s no coincidence that trauma insurance first appeared about 20 years ago, when boomers started to take on the financial liabilities that come with house ownership and raising families, as a larger potential market prompted huge innovation in insurance product design to meet their protection needs.

Later, one of the best strategies for accelerating accumulation – transition to retirement – happened to appear shortly after the first boomers hit 55.

The influence of baby boomers on financial infrastructure continues: the unstoppable rise of self managed superannuation funds has coincided with cashed-up baby boomers looking for greater control, choice and flexibility.

Don’t rely on averages

While averages are useful, they can be misleading. Retirement planning software tends to deal in averages – whether it’s life expectancy, future returns or income generated. But we all know life isn’t as predictable as that.

While the average life expectancy of an Australian male is 83, only 4 per cent of Australian men die at this age and more than half of them live longer.

For example if you are 60 and retiring today, there is a one-in-two chance that you or your spouse will still be alive after the age of 90*.

However, if you are from a mid-to-high socio-economic background, enjoy a comfortable lifestyle and are generally in good health, there’s every chance you will live longer.

Combined with increasing life expectancy, I estimate there’s a 50/50 chance that my wife or I will live to the age of 95: that means we need a 35-year retirement plan.

When it comes to predicting future retirement income needs, basing assumptions on previous average market returns can be equally as dangerous.

Let’s look at Australian share prices over the last century or so. Since 1900, the average annual return on the All Ordinaries Index was 13.6 per cent.

But on only one occasion over the past 110 years have investors actually received a return between 13 and 13.9 per cent. And in only three years has the return been within 100 basis points of 13.6 per cent.

The range of returns has fluctuated – from a 40.4 per cent fall during the recent global financial crisis (GFC) to a 62.9 per cent rise in 1975 as the world’s stock markets rebounded from the oil crisis. When it comes to predicting future returns, averages are a poor yardstick.

The risk of retiring in the wrong year

As Australians live longer and enjoy more active retirements, we’re rightly hearing a lot about longevity risk. But the sequence of investment returns, which isn’t as important when accumulating, can become critical in retirement.

If you happen to retire in a year when the market loses 10 per cent, then the risk that your savings will run out within 30 years increases from 1-in-3 to 2-in-3**.

Sequencing risk isn’t a major feature of our advice terminology now, but in five years time I believe we’ll all be using this language when talking about retirement income.

Climbing down the mountain

You might be surprised to learn that more people die coming down a mountain than climbing up – so much focus and planning goes into the ascent that the descent remains neglected.

It’s too easy to relax after reaching your summit and lose concentration on the road down. Having the right support is critical and anyone going it alone is taking a big risk.

As an industry, our focus has been on helping individuals build wealth. Financial advice businesses have evolved to cater for the needs of baby boomers at every life stage.

With the majority of these clients still in their 50s and with high asset levels, few liabilities and surplus income, many advisers remain understandably focussed on pre-retirement planning.

As an industry, our next challenge is to help the boomers climb down the mountain by providing quality financial advice geared towards retirement income.

Onwards and downwards

The very nature of retirement is changing. It used to be a short rest before death but now it’s a reward for hard work – a chance to hitch our wagon to the grey nomad trail around Australia or travel the world.

The biggest fear for many retirees is losing their regular monthly pay cheque. On approaching retirement, many people’s mindset changes from wealth creation to wealth protection.

They don’t want to be sweating over the small stuff and poring over the sharemarket’s daily movements. Instead, they’re looking for the peace of mind of a regular income to replace that monthly pay cheque.

The catchcry of many retirees is: “I don’t want you to make me rich, I just want you to ensure I am never poor.”

Meeting the need – income and protection

The move from accumulation to retirement income will entail a complete shift in thinking about investment portfolio planning for retirees.

We have to think about building purpose-based asset allocation strategies that deliver regular income.

In addition, the GFC has left a deep scar and clients expect their advisers to be more proactive in managing the possibility of another downturn. After all, in a 35-year retirement there are likely to be seven years when the market will fall.

Over the next 10 years, I think it will become the norm for retirees to have a guarantee over a significant portion of their retirement funds. Once again, the boomers will be shaping advice strategies and product development as they have done so often in the past.

Seize the day

The successful financial advice businesses of the past needed a deep understanding of financial protection and wealth accumulation.

As the generation of baby boomers continues to profoundly influence our industry, the successful financial advice businesses of the future need to add to their mix a deep understanding of post-retirement strategies.

We are standing at a pivotal moment for our industry. The future of providing quality financial advice lies in these key areas:

• managing assets in retirement;
• creating and maintaining a regular, sustainable income stream; and
• making sure clients’ incomes last the distance

Barry Wyatt is the director of sales at AMP.