14 January 2019 - Cited from the Financial Standard website

Retiring with dignity requires superior income solutions

With the financial services industry being shaken up by the Hayne Royal Commission and greater government scrutiny, Australians are demanding greater transparency from their financial products, including more suitable retirement solutions. Almost 900,000 Australians expect to retire over the next decade and retirees are living longer than ever before: a 60 year old man could expect to live 20.78 more years in 2000, but in 2010 he could expect to live a further 23.28 years[1] By 2041, the average time spent in retirement will be 24 years[2] - that's a long time to be living off your savings.

Simply put, more innovative thinking is needed when it comes to how we fund retirement.

Meeting retirement needs

This presents a huge challenge to investors and their advisers who are struggling to balance capital growth and risk protection.

Allianz has done considerable research in recent times asking retirees what they want most during their years after work. A common theme is that retirees "don't want to run out of money and be a burden to my family and loved ones."

In particular, retirees value the following four objectives:

  1. Security. This includes protection from market downturns.
  2. Growth. Retirees need to be in the market and grow their assets to fund their retirement.
  3. Income.  People want to be able to withdraw funds when they need them.
  4. Flexibility. An investment strategy must be able to change with markets and a person's circumstances.

Many of the products on the market aren't geared to support the above four goals at once. Traditional options like term deposits generally do not provide enough income to sustain comfortable living standards for many retirees in the long term, while growth-focused products risk wiping significant value from people's retirement savings in a bear market.

To meet these objectives, retirees need bespoke investment solutions to manage the many risks they face. Their investment strategy must be able to change with their circumstances and respond to the risks retirees face over their investment journey, including longevity risk and the risk of losing money in the share market.

Alternative solutions

Recent data from the Australian Bureau of Statistics illustrates the point that consumers' retirement savings aren't working in the way they need them to, as more than 40% of men and 30% of women are choosing to delay retirement until they feel more financially secure.[3] Almost half of retirees also still cite the government pension as their primary source of income, while 37% of women are relying on the income of a partner in retirement instead of their own.

Australians relying solely on the pension for their retirements, face the risk of it not being sufficient for their needs, and the government is under pressure to restrain the increasing costs of the pension by reducing accessibility of the pension for retirees over time, increasing the age of eligibility and more rigorous testing of income and assets. Meanwhile, other retirement products are still exposed to market volatility, which can quickly erode capital value and wipe out income.

We believe the financial services industry can reinvigorate how it approaches retirement portfolios to deliver innovative products that cater to the challenges of this evolving market and meet the specific challenges of retirement, including longevity risk, inflation risk and market risk.

We encourage the financial services industry to think differently and innovatively about retirement portfolios, outside the traditional 'boxes' that previous investment products have fit into. This means combining protection and growth in a manner that deals with the specific challenge of sequencing risk, thereby helping retirees to manage the shift from accumulation to decumulation.

Having such options available will help Australian retirees to sustainably grow their nest eggs and live with peace of mind as they enter retirement.

[1]

3105.0.65.001 Australian Historical Population Statistics, 2014

6. Life Expectancy

[2] ABS Life Tables, States, Territories and Australia, 2014-2016, October 2017.

[3] Retirement and Retirement Intentions, Australia, July 2016 to June 2017