Planning ahead for your retirement

There is no doubt that recent months and the COVID-19 pandemic have changed the priorities and the ways Australians think about their retirement income strategies and how they plan for unplanned events.

At the same time, it has become clear that the complexity of the Australian retirement income system has made it hard for many to navigate, which is particularly an issue for those who enter the decumulation phase and need to rely on their savings.

The Government’s Retirement Income Review (RIR) report, which was released by the end of 2020, confirmed that providing better assistance for people on how they can optimise their retirement income through the efficient use of their savings is high on the agenda.

The report revealed that the general tendency was retirees were reluctant to draw down their savings in retirement and consume funds due to the system’s complexity as well as concerns about possible future health and needing the money for aged care costs. On top of that was the uncertainty around the impact of the COVID-19 pandemic.

The report also found that the lack of understanding of the superannuation system, combined with misconceptions and low financial literacy, often resulted in people not adequately planning for their retirement and not making enough the most of their assets when in retirement.

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According to the report, one of the major misunderstandings was the view that ‘retirement income’ involved the return from investing superannuation balances rather than drawing down those balances to fund living standards in retirement.

The report revealed the majority of retirees would most likely leave the bulk of the wealth they had at retirement as a bequest even though superannuation savings were supported by tax concessions for the purpose of retirement income and not purely for wealth accumulation. 

Although the overall objective of the Australian retirement income system was to deliver adequate standards of living in retirement in an ‘equitable, sustainable and cohesive way’, 71% of people aged 65 and over received the Age Pension or other pension payments, as of June, 2019, with over 60% of those people being on the maximum rate, according to the RIR.

On the other hand, there were over 11,000 people with a balance in excess of $5 million, as of June 2018, of which many very large superannuation balances were built up under previous high contributions caps. The report confirmed that people with very large superannuation balances received very large tax concessions on their earnings.

IMPACT OF COVID-19

Although the long-term consequences of changes, including early release of super, for those in need were not yet fully known, the one thing the pandemic helped with was it brought to the fore superannuation and planning for retirement for many, including the younger generations, and that was a good thing, according to chief executive of Allianz Retire Plus, Matt Rady.

“The earlier you look at seeking some kind of advice, the greater your awareness on how much you need to save to live comfortably and within your expectations in retirement. Most people do not really know the answer to that question,” he said.

“I think the key role of the adviser is to help give people confidence around their choices of spending today versus the lifestyle they are likely going to be able to afford in the future. I would like to think that what we need to do is to give the community the confidence that the advice profession is a real profession and the earlier you engage with financial advisers, the more likely  you are to achieve your goals in retirement.”

However, there was no silver bullet when it came to the needs of people who entered retirement.

People had very different ideas on what the retirement should look like and their financial needs also became very diverse, making it harder, compared to the accumulation phase, for product and solutions providers to accommodate those needs.

“When people are saving for retirement and are in the accumulation phase, their needs are in general quite similar, they try to maximise their returns, and particularly those at a younger age, are looking for the investment options that give them the highest returns by the time they get to the retirement,” Richard Dinham, head of client solutions and retirement at Fidelity International, said.

“Retirees, on the other hand, are much more diverse in their needs than the accumulators and therefore it is much more difficult to meet their needs with a single set of solutions or products.”

RETIREMENT AND RISKS

It is not a secret that retirees are very conservative and tend to draw down from their superannuation less than they needed to, therefore access to financial advice at this stage of life was of particular value, according to experts.

“People do not like to take risks naturally but they have to otherwise they will be guaranteed very low returns for their investment portfolio, which may cause them difficulty later on. So retirees need to take on some risks and this is where their advisers can help,” Dinham said.

According to Dinham, the role of an adviser was crucial when it came to determining what level of risk the retiree was comfortable with and, at the same time, advisers were also in a position to provide some comfort by locking away certain degrees of safety.

Traditionally, in a high interest environment, people were able to earn an income even on their more conservative investments in portfolios, such as cash and fixed interests.

“But in a low interest environment the only place where you can generate income is in riskier investment asset classes, such as equities, so you either accept to take the lower income or you dial up the risk and if you dial up the risk then clearly the probability of running out of money increases,” Rady said.

“So what we need to do is  provide people with a degree of confidence on how much they are able to draw down comfortably without running out of money. We need to provide them with investment products, that help manage the downside risk in the event of market failure.”

Rady also stressed that the current system placed too much focus on the accumulation phase in super, with all the public policy concentrating on how to get money into the superannuation system while, at the same time, there was very little conversation happening on how to actually get money out of the system in most the effective ways for retirees.  

“We actually have a confidence problem in the system, in that people do not have the confidence to spend their superannuation balance comfortably. I think we need to talk about the ways we can help provide people with a greater degree of confidence and comfort of how much income they are going to receive on an ongoing basis. This means we stop thinking about super as a balance to preserver and start thinking about it in terms of how much it might help enable regular monthly income people seek to replace their pay check. People need greater clarity as to how much income they are going to receive on a regular basis for the rest of their lives,” he said.

Ashton Jones, head of investments, retirement and new propositions at TAL, said: “TAL is focused on those post-retirement solutions to help manage risks that are more apparent in retirement, like the longevity risks management. 

“One of the first challenges is to how you help retirees overcome that fear of running out of money and what are the solutions that you can offer them to help consume that balance in retirement rather than seeing it as a lump sum amount that they have to withdraw at retirement.

“Those are the areas that probably do not get a lot of focus in the accumulation phase but they become much bigger risk factors in the post retirement phase and they are events that can really affect people incomes in retirement. There has been a lot of conversation in the industry about the need to do more in retirement for members and, in particular, on a broader range of solutions.”

One of the solutions, he mentioned, might be the longevity protection or investment-linked style longevity product that would guarantee an income and allows members to have the certainty about what their income is going to be throughout the retirement.

ROLE OF ADVICE

The complexity of the superannuation and retirement system had put extra pressure on retirees, who often lacked the knowledge of how to use their balances effectively but for whom the ability of making well-informed financial decisions was crucial. 

Rady said that retirees definitely needed at least ‘some form of advice’, but again providing the advice to those who needed it most proved expensive. 

“It is not through a lack of interest from advisers around servicing the mass market – it is the fact that advice becomes too expensive because the compliance burdens associated with  doing so are too onerous,” he said.

“We need to find a way of removing or reducing the burden of providing advice, and enabling more scaled advice in a way that gives advisers the confidence to be able to do it.

“The second thing, which is an industry wide challenge, is providing or enabling the technology which allows advisers to deliver advice in a more efficient way and clearly that is in progress but, at the moment, advisers are not affordable by the people who need them most. The industry has the responsibility to help try to make it more efficient.”

A FAMILY DECISION

According to Jones, funds also needed to better acknowledge that retirement should be viewed as a family decision.

“Most people usually plan for the retirement as a family unit but products are typically designed for individuals rather than a family unit and in retirement the family unit is the most important thing because the Age Pension entitlement is based on both the spouse income as well as the primary account holder,” he said.

“The other reason is that members look at the retirement as a family event and the impact that longevity risk can have on retirement outcomes is quite different for an individual versus a couple. Looking at retirement and looking at the membership base in a family unit construct rather than the individual construct we think this is something important for funds to consider.

“The other thing we think is important for funds overall probably to try to segment their membership base into different cohorts, the pre-retirees and retirees, and try to understand what the psychological attributes and preferences for those different cohorts are because retirement is a very personal experience.”