Riding out the retirement storm

Australia has one of the highest ageing population rates in the world but legislation continues to shackle innovation. This article explores whether any progress has been made, and how advisers can guide retirees to a smooth retirement.   

Australians are living a longer, healthier life, which is a heartening trend. But the country faces a new set of challenges in terms of policy, incomes, and future standards of living amidst the shift in the size and structure of the population.

According to the 2015 Intergenerational Report, Australians will have one of the longest life expectancies in the world.

In 2054-55, life expectancy at birth is predicted to be 95.1 years for men and 96.6 years for women, compared with 91.5 and 93.6 years today.

The report also said 4.9 per cent of the population or nearly two million Australians will be 86 and over, compared to around 80,000 people, in 1974/75.

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The Association of Superannuation Funds of Australia's (ASFA) 2011/12 data showed the average Australian male retires with an accumulated balance of $197,000, while women retire with $105,000.

This is insufficient for retirement, especially if individuals' lifespans extend longer than expected.

Furthermore, it is only after 2040 that retiring Australians would have contributed to their superannuation their entire working lives.

The changing demographics will open new opportunities for financial advisers and planners, with ASFA chief executive, Pauline Vamos, noting that while the adviser had a crucial role, they needed to be abreast with complex issues to be equipped to guide clients.

"I don't think they have had the need to be equipped, but now they need to. The other thing is that up until most recently, people have not had high account balances. That is now changing, so that's why it's a good time to have the conversation," Vamos said.

According to April's DEXX&R Market Projections Report, retirement income funds under management (FUM) will hit $1 trillion within 10 years.

Meanwhile, total assets held in the retirement income market were predicted to burgeon from $527 billion at December 2014 to $1.078 trillion in December 2024.

Retail allocated pensions FUM were expected to hit $408 billion and make up 38 per cent of the total market.

Time is ripe for advice

Financial planners are aware that over the next 25 years the number of Australians aged 65 years and over will double and are adapting their businesses to cater to this clientele.

State Super Financial Services (SSFS) managing director, Michael Monaghan, acknowledged product issues, but said an on-going relationship between the client and the planner was crucial because retirees' investment and expenditure needs evolved through retirement.

"We need to really be able to sit down with clients and help them think through what their expenditure patterns are likely to be over the next 15-20 years, making sure that they're looking at their total range of activities in their lives and all of their assets," Monaghan said.

"But it's also about taking into account other activities people might want to do when they're in retirement, and that might be some part-time work, and also alerting people to the fact that in later life, they won't need so much expenditure so they don't need to be quite so conservative perhaps as in the earlier part of their lives."

Investment Trends research revealed 32 per cent of planners predicted retirees 75 years and over would make up a larger percentage of their client base by 2017.

Senior analyst, Recep Peker, said clients tended to seek advice more as they approached retirement. Those over 40 may not have retired yet but over half of them had unmet retirement advice needs.

On average, 37 per cent of financial planners' clients were in retirement.

"There's definitely a huge opportunity for financial planners to position themselves to best take advantage of the demographic shift," he said.

"We're seeing advisers already moving in that direction and more advisers are saying they expect retiree clients to make up the greater portion of their client base."

The three risks

Advisers have a central role in protecting clients from three risks in retirement: market or sequencing risk, inflation risk, and longevity risk.

Sequencing risk, which comes under market risk, is where money lost is tougher to earn back because the investor needs a bigger return to counter any losses.

Longevity risk is a significant concern as retirees worry about outliving their savings.

There is an estimated $70 billion that will move from accumulation into retirement this year, and this is set to grow to about $190 billion in 10 years.

Challenger Life's chief executive, Richard Howes, said the three risks had not received much attention during the accumulation phase.

He proposed an outcomes-based advice model, with income layering at its core.

Clients could secure a base income, through the age pension, and they could then layer that with a private pension like a lifetime annuity.

"Beyond that there are layers of income that are more aspirational, and perhaps to do with estate planning, which more risky assets or account-based pensions are well-equipped to deal with," Howes said.

Caring for the aged

Advisers could expect expense needs to fall significantly among clients in their 80s and 90s, until they encounter medical problems, and potentially have to enter the aged care system.

Financial Planning Association chief executive, Mark Rantall, said advisers were capable of handling the retiree cohort, but said they needed specialisation in aged care.

"That has specific technicalities that do require financial planners who are involved in that sort of work to come up to speed with the technical aspects of aged care.

"But I think for many of these things, as the need arises, people skill up," he said.

BT Financial Group's senior manager of advice strategies, Bryan Ashenden, was concerned that there was a dearth of advisers who currently specialised in this area.

While the current capacity could meet aged care needs, he said it was essential the industry thought about whether it could meet those demands in the future.

"There are probably pockets where that advice exists. I think your question becomes with the spread of population do we have enough people across the country, whether it's in major metropolitan areas and regional areas that people can give that advice that's relevant for them?" Ashenden asked.

"I think that's where we've got to question whether it is something we need to broaden out the general knowledge of not just advisers but also the end client so they know they need to start asking questions and seek advice."

Investment Trends' research showed 59 per cent of the 617 planners surveyed provided advice on aged care, but only to seven per cent of their retiree clients. But 85 per cent intended doing it in three years to nearly a fifth of their clients.

"Fewer than one in five Australians say they have enough money to cover their expected aged care costs but clients may not think they need the help so there's definitely room for advisers to educate them," Peker said.

Advisers have a myriad of issues to think about including structuring clients' affairs to get them into the right aged care facility, sorting out their age pension situation, and knowing how much bond they will have to pay.

Read part two of Malavika Santhebennur's report: The Annuity Ambiguity
Read part three of Malavika Santhebennur's report: The Proof is in the Portfolio