The retirement income challenge
Renato Mota, General Manager, Distribution
The current low interest rate environment has made it challenging to find the optimal mix of strategy and investments for clients in, or approaching, retirement. And with around half of all term deposits in Australia held by the over 65s, it reinforces the value of an adviser-led retirement strategy.
But even though low interest rates create some challenges for advisers, they also bring opportunities.
Currently, around half of all Australians planning retirement expect super to be their primary source of income when they retire1 - a figure only expected to grow in the years ahead as super balances benefit from increased contributions. However, with Australians today expected to live well into their 80s, very few of these super balances will be able to support a full retirement.
The increasing risk of a super shortfall is just one of the challenges for advisers and clients in a world of ultra-low interest rates. Advisers that help clients meet this challenge not only makes a material difference to their clients' quality of retirement, but also have an opportunity to remain engaged with clients over the long term.
Low interest rates are forcing advisers to rethink the traditional lifecycle investment approach, where retirees increasingly shift into lower risk assets such as bonds and term deposits as retirement approaches. Maintaining this status quo is leaving more and more retirees short of their income retirement goals as low-risk returns diminish.
However, clients who maintain growth assets or swap out of a term deposit (albeit at a low interest rate) into dividend yielding equities as they chase a sustainable retirement income may be taking on unintended risk.
There is no one-size-fits-all approach to finding the right asset allocation strategy for your clients' unique circumstances, however low interest rates are making this more important than ever. Built into a broader conversation of maximising retirement income, this offers a high-value opportunity to engage with clients who want to minimise the damage of low interest rates on their portfolios.
Managing clients' expectations is another important role for advisers.
There is still a perception that super is a 'pot' of money accessible at or around retirement – a mindset that is seeing super used to fund one-off lifestyle assets such as a boat, holiday or gifts for the kids.
This needs to be reconsidered in light of realistically being able to maintain living standards in the latter stages of retirement.
Arguably, however, it is behavioural risk that presents the greatest destructive risk to the value of a clients' portfolio. Helping clients maintain focus on their long-term goals and keeping them invested and engaged in periods of high volatility will add material value to their portfolio.
Value of advice
Into the future it's expected more and more products will emerge combining income and risk management characteristics. Together with the age pension, these will play a critical role in optimising clients' retirement incomes.
Great financial advice, however, is not about product. It's about finding personalised and specific solutions to meet your clients' lifestyle objectives and creating realistic expectations – from estate planning, liquidating assets tax-effectively through to cash flow and more.
And one thing is certain – while products will assist in the solution design, they are not the solution – affordable access to relevant and personalised advice will ultimately maximise the number of Australians making the most from their retirement. Products and service-design in the retirement space will play an important role in ensuring advisers can affordably maximise client outcomes in a cost effective and bespoke manner, with technology and access to global markets playing a critical role in this delivery.
1 A 2013 Australian Bureau of Statistics survey