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Many retirees are aware of longevity risk, but not everyone has prepared their finances to ensure that their retirement will be the enjoyable experience they desire. Outlined below are four steps you can take to help your clients plan for a long and enjoyable retirement.
1. Set up an appropriate plan
The first step in helping your clients have a successful retirement outcome is to plan appropriately. Your clients also need to have realistic expectations about their life expectancies. These days, Australians are living longer than ever. There is a 50% chance that one member of a 65-year-old male/female couple will still be in retirement 28 years from now. When you are building a plan to fund the retirement lifestyle of your clients, they need a plan for how they will source income to spend throughout retirement including these later years. Costs associated with assisted living and aged care will also have to be considered.
2. Consider clients’ spending behaviour
Your clients may continue to have the mindset of saving and preparing for the future into retirement. They might be aware of their longevity and are therefore still focused on saving for another rainy day. In some cases, their fear of running out of money could lead to a situation where they underspend and do not enjoy the lifestyle they can afford early in their retirement when they still have the health to enjoy it. Advisers can help reduce their clients’ fears of running out of money, helping them to enjoy a better lifestyle through proper planning as outlined in the next step.
3. Build a floor for future income
With a modest level of savings and increasing longevity, the average retiree household has to decide between spending more now but having only the bare minimum of the Age Pension later on or spending less now, but sustaining a higher level of income through the rest of their lives. Behavioural finance research indicates that people are not always well equipped to deal with the trade-off between now and the distant future1. You can help your clients meet both needs with the use of appropriate strategies. Using an income layering approach to your retiree clients’ portfolios is a way to achieve this. This strategy outlined below uses a lifetime annuity and the Age Pension to meet the day-to-day necessary expenses while an account based-pension provides for wants such as entertainment and holidays. Allocation to a lifetime annuity will also help with cash flow management and limit the impact of market volatility on the overall retirement portfolio.
4. Make planning work
A simple plan of partly allocating retirement assets to a lifetime annuity should assist the majority of retirees who are worried about outliving their savings. Locking in a floor for the future will reduce the need to worry about market volatility in the short run. Market swings will still impact the timing of when the level of discretionary spending needs to be cut, but the floor will ensure that clients always have the minimum for what they need. Taking comfort in that floor, they will then be able to enjoy the comfort of spending to enjoy the lifestyle that they want now and to continue to invest in market-linked investments subject to market volatility.
The next steps
Consider how your clients will cover their minimum spending needs throughout their retirement. Challenger offers a range of tools and resources to help advisers with retirement income strategies including information on lifetime annuities.
Log in or register for Challenger’s AdviserOnline to access these resources, and to find out more about including annuities in a retirement portfolio.
You can also watch our video to help your clients navigate the different retirement income options available to them by understanding the income layering approach.
1. Benartzi, S. and Thaler R. ‘Heuristics and Biases in Retirement Savings Behaviour. Journal of Economic Perspectives, Forthcoming. Available at SSRN: http://ssrn.com/abstract=958585
This information is general information only and does not take into account any person’s objectives, financial situation and needs.