The financial services industry needs to shift the conversation with clients from total wealth accumulation to drawing an income in retirement.
“There’s no silver bullet when it comes to helping consumers better understand retirement products or strategies. Simplifying often complex subject matter is a challenge, but one thing we can do to assist consumers with their retirement income planning is to encourage them to think of income in dollar terms, not percentage terms,” said State Street Global Advisors, Head of Retirement Solutions – Australia, Jonathan Shead.
This was one of the key messages from Shead, as he redefined the stages of life, the transitions between them and the resources consumers needed to better plan their income throughout their active retirement phase.
Speaking at IMAP’s Investment Forum in October, Shead said retirees at age 70 today, can expect a life expectancy of another 20-30 years, meaning their income in retirement needs to last much longer.
“With people living longer and more active lifestyles, the whole structure of the economy will change. However, this will have long-term implications for planners,” Shead said.
“Issues around longevity will require planners to deal with major new risks, such as clients outliving their retirement income or early incapacitation of clients and the effect that will have on their income.
“And as we live longer, there will be changes to traditional family structures, with the emergence of four generation households. This includes issues around intergenerational wealth transfer.”
Retirement expectations
However, according to Shead, research from State Street showed that most Australians now understood that they “owned” their own retirement and would need to be less reliant on the Government to meet their income requirements in retirement.
But even with this realisation, Shead said only 20 per cent of Australians were confident about their retirement planning, with one-fifth of the working population (23 per cent) seeking financial advice.
“Most Australians think they need about $500,000 to adequately retire on, but even if that amount is invested in the market and generates, say, 5 per cent per annum, that’s only $25,000 to fund their retirement income needs. That’s probably not enough for most people, who can expect to live a longer, healthier and more active lifestyle than their parents’ generation,” he said.
“Not surprisingly, 42 per cent of people surveyed said they expected to work longer and retire later in life.”
Generating income
According to Shead, the Government’s decision to support the development of more efficient retirement income products provided opportunities for the industry to develop Comprehensive Income Products for Retirement (CIPR).
He suggested a possible integrated retirement income product might comprise of three age/lifestyle stages, as follows:
- Age 20-65 - Accumulation phase. Saving for retirement starts at age 20.
- Age 65-80 - Decumulation phase. At age 55, begin allocating to income, and at age 65, purchase a deferred annuity.
- Age 80 onwards - Guaranteed lifetime income phase. Purchase of a guaranteed lifetime annuity.
“While I don’t think we’re going to see a sudden rush of people taking out annuities, I do believe annuities will provide a part of the overall CIPR strategy for clients. So, it’s important that planners don’t ignore the CIPR debate.”
Getting ahead of the curve
For planners wanting to get ahead of the curve in retirement income planning, Shead offered four tips:
- Learn how the retirement workforce is changing;
- Understand people’s lack of confidence when it comes to retirement planning;
- Recognise that the industry is not structured around ‘income’; and
- Investigate new products and solutions, which means not ignoring the CIPR debate.
“There is a need for advice and a willingness by consumers to pay for it,” Shead said. “But we need to shift the conversation away from total wealth accumulation, to drawing an income in retirement. That means thinking of income in dollar terms, not percentage terms.”