Bridging the retirement advice gap
Financial advice is often proposed to help members, but there are obvious scale challenges for this. An increasing number of members approaching retirement and the decline in active advisers exacerbate the scale challenge. Arguably, there should be a less resource-intensive way to help members.
Without any help it is likely that many members will remain in the accumulation phase. APRA data indicates up to 2 million accounts are still in accumulation that could be enjoying the tax-free pension phase.
While better education of members and the provision of calculators can help, this is unlikely to do enough on their own to help everyone into the right solution for their retirement. There are scalable alternatives that don’t have the resource constraint of trying to deliver comprehensive advice in its current form.
Rising demand: More Boomers and beyond heading into retirement
The origins of Australia’s superannuation system include the realisation that the Baby Boomer generation would eventually retire and the change in the dependency ratio could have dramatic effects for the economy. With an average age of retirement between 60 and 64, the Boomers started to retire in the early 2000s. The growing number of retirees can be seen in Figure 1, with the acceleration from 2006 noticeable. This chart shows the number of people a few years younger than the typical retirement age of 65. This is when people are likely to seek financial advice to confirm that they are ready for retirement.
Figure 1 People approaching retirement aged 60-64, Actual and projected
Source: ABS, Actual data to June 2021
Increasing demand for financial advice to help with retirement issue is expected to continue for at least another decade as the younger Boomers retire. In a market economy, higher demand normally leads to a supply-side response to meet the increase in demand. This is not happening.
Falling Supply: the decrease in Australian financial advisers
The number of Australian financial advisers has been in decline in recent years from almost 28,000 to around 15,000 today. Adviser Ratings expects this to decline further out to 2025. This leaves fewer advisers to service the needs of the growing retiree base. Fewer advisers servicing a growing number of retirees is leading to a reduction in the number of people getting advice. Adviser Ratings also estimate that only 10% of Australians paid for financial advice in 2021. People aged 55-64, were more likely to get advice, but still fewer than 1-in-4 paid an adviser in 2021. With fewer advisers and more retirees, the retirement advice gap will grow.
Plotting the unknown: What might a solution look like?
To bridge the advice gap an innovative solution will be required. While there is a range of potential solutions, an effective one might involve:
- A Journey. Guidance that starts before a member retirees. By the time they retiree, it might be too late for the member to achieve what they want. Having guidance along the runway into retirement will maximise the opportunity to improve the outcome.
- Simple to drive. Like a modern car the solution might be complex to build, but the users don’t need to look under the hood. They need a solution where they can turn a key, or just push a button these days and get to their destination.
- Clear directions. When the solution requires input or action from the retiree, they will need clear directions on what to do.
- Spending guidance. The accumulation phase is about growing as much savings as possible, but in retirement, that changes. What the retiree needs to know is how much they can spend. This can be calculated for any savings balance. In retirement, the option is to change when the spending occurs.
- Investment automation. Most members use the default accumulation investment vehicle because they can’t do better than the experts who built it. The same is true for retirement. Retirees should start with the best investment option as their base case.
Keeping it simple for the member
There is an advice gap for retirees that is not going to close on its own. There is a potential solution to achieve the scale required to close this gap. Essentially the only two levers that a retiree has is how to invest their money and how to spend it. Most members leave the investment decision to the experts in accumulation, so that approach will probably work for retirement. What they really need help with is their spending. They can figure out the ‘how’ on their own but a solution that guides them on ‘how much’ and what happens if the ‘when’ changes will be able to meet most of their retirement income needs. And it can be done at scale. The rest can be left under the hood so they can enjoy their retirement.