Building the foundation to help Australians fund a fulfilling retirement remains one of the hardest problems to solve in finance.
None of us knows quite how long our retirement will last, let alone how much we'll spend, or just when we'll need to spend it. Averages and estimates can only reveal so much. It is little wonder then that retirees want it all: to generate the highest lifetime income possible with both certainty and flexibility. Unfortunately, these goals often work in opposition.
Advisers are well placed to untangle clients' needs from wants, helping them to make balanced choices that offer the best of both worlds.
People need to fund a longer retirement…
An Australian man born today can expect to live to 91.5 years of age, ranking equal first in the world alongside Iceland. An Australian woman can expect to live to 93.6 years, surpassed only by Japan, Spain, France and Italy1.
On this basis, it means that the average Australian born today might expect to spend 20 years or more in retirement.
Yet the average superannuation balances at the time of retirement (assumed to be age 60 to 64) in 2015-16 was just $270,710 for men and $157,050 for women, according to an October 2017 ASFA report.
While the government Age Pension is often underestimated as a financial backstop, it still leaves people exposed to legislative risk (such as changes in the eligibility age or the taper rate) and emotional uncertainty.
Many people will want a higher level of super savings to fund their retirement lifestyle.
… yet they are highly risk averse
Higher investment returns are a key means to boost retirement savings, but they also require taking on extra risk. This can be highly uncomfortable for many older Australians. While the average person feels the pain from a loss twice as much as the pleasure they feel from a financial gain, retirees are five times more sensitive to losses, according to a 2007 study by AARP and the American Council of Life Insurers.
This reflects their intuitive understanding that losses later in life hurt more – a phenomenon known as sequencing risk.
If a downturn strikes when portfolios are near their largest or while drawing down a pension, it can devastate retirement savings. Retirees don't have the same time in the market to benefit from a market rebound and are no longer investing when assets are cheaper.
Timing is everything.
The Productivity Commission2 estimates that a ‘typical’ Australian retiring after 47 years in the workforce would have an average after-tax balance of about $1.1 million but with a 5% chance of the balance ending below $500,000 and a 5% chance of it being about $2.1 million.
Fig 1: Luck gets more important the longer people work
The SmartShield solution
This contradiction – older investors know they need to take more risk to receive higher returns but struggle because the danger is larger – can cause investment paralysis, particularly in the current low-rate environment.
Milliman's SmartShield Series offer an affordable solution to this retirement challenge. Each portfolio incorporates a strategy designed to provide protection and risk management while maintaining a focus on growth.
Including SmartShield in your clients’ medium or long-term investment strategies is a great way to help them enjoy financial well-being in retirement, while resting easy that their investment risk is managed.
Staying active plays an essential part in staying healthy in retirement. It’s the same for investment strategies – a portfolio with an active risk management approach helps people stay financially stronger, for longer.
You can find more information about the Milliman SmartShield range at https://advice.milliman.com/en/smartshield.
This document has been prepared by Milliman Pty Ltd ABN 51 093 828 418 AFSL 340679 (
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1UN data for the 2010-15 period cited in the 2015 Intergenerational Report
2Australian Government - Productivity Commission Superannuation: Assessing Efficiency and Competitiveness, Inquiry Report no. 91 Technical Supplement 6 December 2018