Retirement time bomb requires complex thinking
The majority of Australia’s super assets now sit in the hands of retirees and pre-retirees, but many require more nuanced investment strategies to achieve the lifestyle they want in retirement, a recent report has found.
Fidelity International’s Building Better Retirement Futures report stated that Australia’s retirement system had “reached a crucial juncture” where the majority of super assets were in the hands of those over 50.
“As this shift has happened, there has been growing recognition that more thought needs to be given to strategies and investments specifically designed for post-retirement decumulation – the drawing down of the accumulated savings in the form of income over the lifetime of retired investors,” the report said.
The paper cited CoreData research, which revealed that just 43 per cent of the current crop of retirees believed their retirement lifestyle was in line with what they had envisioned. Of those who had yet to retire, 44 per cent believed that some of their plans would not be fulfilled in retirement.
Housing was also an important concern for retirees, with those who did not own their own home scoring the lowest for retirement satisfaction compared to those who owned one or more properties with nothing left to pay.
The report outlined common strategies, which could be used for retiree clients depending on their level of financial literacy and different sources of income in retirement, such as conservative asset allocation, simple or complex “bucketing” of funds and income layering.
However Fidelity said that “not all of the [strategies] address all of the risks individuals face in retirement”, such as sequencing risk, longevity risk and inflation risk.
The income layering approach, where retirement portfolios were divided according to a retiree’s lifetime spending needs, was found to address all of these risks.
“The income layering approach separates a retiree’s needs from their wants, or nice-to-haves, and prioritises income accordingly,” the report said.
“High-priority needs are protected from market volatility for life, with the portfolio anchored by the age pension. Income to pay for essentials can also be secured, and sourced from annuities.”
However Fidelity cautioned that the strategy had a high degree of complexity and needed frequent reviewing between the adviser and client.
“Budgeting and creating income streams for a retiree’s expected lifetime can be a complex task,” the report said.
“An income layering strategy requires close collaboration between planner and client, and regular reviews to ensure the strategy remains effective in light of any changes in a retiree’s personal circumstances or in market conditions.”