Balancing priorities and maximizing income in retirement

The key to retirement planning is successfully balancing a client’s need for income and longevity protection with their desire to leave an inheritance to their loved ones if they unexpectedly die early. George Lytas writes.

Retirement planning - like any kind of personal advice – isn’t a set and forget exercise. The needs and goals of retirees change markedly as they progress further into their retirement years.

While all retirees are different, most have similar priorities. They want a regular, reliable income stream that will fund an enjoyable lifestyle, protection against running out of money if they live longer - and the ability to leave an inheritance to their loved ones if they die earlier. The order of those priorities will change depending on their personal circumstances, age and stage in life.

For example, the top priority for many new and soon-to-be retirees might be the ability to access their money and leave an inheritance should they die early in their retirement.

According to data from the Australian Government Actuary, if an Australian male makes it to age 65 they have an 80 per cent chance of living to age 79 and only a 20 per cent chance of dying before then*. For the average 65 year old who has accumulated wealth in their pre-retirement years, they want to know that if they unexpectedly die their loved ones will inherit their estate.  

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However, people in their mid-to-late retirement years may have slightly different priorities.

Retirees who live to age 79 have a 60 per cent chance of living to age 88 so their focus might shift and be more about securing a reliable, inflation-protected income stream to cover their bills and any other expenses.  

At the end of the retirement spectrum, those in their late 80s and 90s are primarily concerned about not running out of money before they die. Having enough for travel and other discretionary spending may not be as high on their list of priorities.

Managing trade-offs

The difficulty with retirement planning is that no one knows exactly how long they’ll live and therefore exactly how much money they’ll need.

Advisers have the challenge of designing and implementing strategies that successfully balance an individual’s desire for income, longevity protection and the ability to leave an inheritance.

In a perfect world, there’d be one optimal retirement solution that did everything. In reality, there are always trade-offs to manage.

Take the two most common retirement solutions within superannuation; annuities and account-based pensions.

An account-based pension gives retirees a regular income stream, some potential for capital growth and full access to their money but once their capital is exhausted, it’s gone. There’s no protection against longevity.

Conversely, lifetime annuities are like an insurance policy against longevity. They provide the security of a guaranteed income stream for life but because investors are exchanging a lump sum for an income stream, no capital will be returned except upon death during the guarantee period.

Research shows that combinations of an account-based pension and a lifetime or deferred life annuity can often provide superior outcomes to an account-based pension alone^.

Over the years, we have introduced new and innovative features to increase the liquidity and attractiveness of our annuity solutions. For example, the CommInsure Lifestream Guaranteed Lifetime Income annuity enables investors to provide for their loved ones in the event of an untimely death under our unique Death Benefit Guarantee. The Death Benefit Guarantee starts at 100 per cent of the initial investment amount and reduces proportionately to nil over the guaranteed period, which can be up to the life insured’s life expectancy.

Another potential retirement income solution is insurance bonds, which may be a suitable alternative to an account-based pension for investors seeking a tax-efficient way to invest outside superannuation.

Interest in insurance bonds has been steadily growing for a variety of reasons including demand for flexible investment options that allow investors to access their savings and address the ongoing uncertainty surrounding the super rules.

With proposed changes to superannuation contribution caps and the limited capacity to contribute more money into superannuation, investors are actively looking at non-super investment solutions.

Given Australia’s rapidly ageing population an enormous intergenerational transfer of wealth could occur, and the many baby boomers who potentially receive a large windfall either from an inheritance, or the proceeds from the sale of a property or business, will need a tax efficient vehicle to invest their money.

One option may be the CommInsure Investment Growth Bond which has been awarded the AFA Plan for Life Investment Bond of the Year Award for eight years in a row. It also offers a Death Benefit and Investment option guarantees which are designed to provide certainty around the minimum value of holdings upon death or withdrawal.

Account-based pensions, lifetime annuities and insurance bonds each have their own strengths and weaknesses.

They each can play a valuable role in helping advisers balance and manage a client’s competing priorities in retirement while maximising their retirement income. 

George Lytas is Head of Annuities at CommInsure.

* Australian Life Tables 2010-2012 (the latest available), including expected mortality improvements based on trends from the previous 25 years. Data is available from the Australian Government Actuary http://www.aga.gov.au/publications/life_table_2010-12/default.asp

^ The Optimal Solution to the Retirement Riddle paper by Colonial First State, a related party of CommInsure, and Ernst & Young, May 2015

Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

CommInsure is also not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and you should seek tax advice from a registered tax agent or a registered tax (financial) adviser if you intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.