A smart retirement plan helps to manage the different risks that are at play during decumulation and ensures that your client’s savings work hard at every stage of retirement. As with any astute investment approach, tapping into diverse sources of retirement income is key when it comes to balancing risk and return.
The retirement products available today – such as annuities and account-based pensions – can stretch to meet your client’s needs, but for many, the risk of outliving retirement savings and being dependent on the Age Pension is real. Unfortunately, for a long time, most retirement products didn’t offer certainty and flexibility.
For most Australians, in retirement there is a need for:
1. A safety net income to cover day-to-day living costs
The Age Pension alone is generally not sufficient to sustain even a modest cost of living. Combining the pension with a regular income stream from a lifetime annuity can top up this basic income to cover essential costs.
2. Access to capital
This may be for big ticket items, to cover major health expenses, to gift to children or grandchildren or simply to enjoy life. Those little extras, such as going out to dinner, seeing a show or going on holiday can enhance your client’s retirement lifestyle. An account-based pension from your client’s super fund could be used to fund this; because payments aren’t guaranteed and may one day run out, using income or drawdowns generated in this structure for discretionary or nonessential spending is worth considering.
Certainty leads to confidence
After a lifetime’s work, peace of mind is a reasonable expectation in retirement and there’s evidence[1] that confidence in retirement is good for your clients. It’s also good for their community and good for the economy; rather than living frugally, confident retirees will spend in their community, support business and live the retirement lifestyle they’ve looked forward to. It’s what your clients deserve in this third phase of life.
However, like many Australians close to retirement, your clients are probably wary of the risks posed by longer life expectancies combined with market volatility. What will that mean for their retirement savings?
What if you could provide them with certainty and flexibility?
To have the confidence to spend and thrive in retirement, Australians need access to capital, a high level of retirement income certainty and the flexibility to deal with the unexpected.
A 2022 Actuaries Institute report[2] noted that combining traditional products with innovative solutions could lead to a remarkable 30 percent increase in retirement income. Further, the report noted that methods such as using investment-linked lifetime income streams have been shown to lift retirement income without increasing longevity risk: a win-win outcome that could see them benefit from larger payments and a better quality of life without increasing the likelihood of outliving their savings.
Rather than having to shoehorn your client’s retirement income needs into existing products to get the ‘best possible’ outcome, there are now innovative solutions that can provide them with the capital protection, flexibility and income certainty that most existing products in the past, didn’t deliver.
Next generation retirement income products
Next generation retirement income products may offer some or all of the following features, subject to their individual product terms:
- Protected growth: Retirees may be able to benefit from growth and a downside protection mechanism limiting risk exposure, while offering the potential for the capital growth necessary to fund longer retirement periods
- Guaranteed lifetime income: Backed by regulated life companies with strong balance sheets and capital reserves, guaranteed income payments are paid for the life of the retiree. A choice of fixed or rising income payments may also be available
- Flexible access to savings: Retirees may be able to withdraw all or part of their account balance at any time so that unexpected expenses can be quickly and easily met
- Control: A range of investment and protection options enable retired Australians to adjust their investment strategies as their needs change
- Seamless integration: Integration into a super fund or an ABP makes administration easier for retirees, financial advisers and super funds
- Long-term surety: Australians can feel confident that the promises made to them today will last for the long-term. Life company backing mean they’ll retire with certainty and confidence
- Investment Value payable on death: Retirees can leave their residual investment value to beneficiaries
Next generation retirement solutions look very different to those that have dominated the retirement income product set in the past. Designed to meet your client’s need for regular income and access to capital, next generation solutions have been devised to mitigate the common risks and ‘what ifs’ faced in retirement.
Importantly, next generation solutions have been designed to deliver increased confidence and certainty in retirement, so the only indecision may be how to best enjoy this new phase of life. While there will always be small worries, with a next generation solution, having access to income and capital to fund a comfortable life will not be one of them.
Access our latest adviser research report.
Our latest adviser research report delves into the different aspects of retirement planning, identifying strategies to help navigate the decumulation phase and manage the associated risks. It provides a framework for developing your own retirement income philosophy aligned to your unique beliefs and business model and the needs of your client base.
To gain deeper insights and practical advice, download your free copy of "Towards a Retirement Income Philosophy" here.