The science of retirement

Superannuation Retirement

By Miriam Herold, Head of Research

With all the recent media about how much people will need in their super to retire comfortably, is it any wonder that there is so much confusion? And, with the recent release of the Retirement Income Review Consultation Paper, this topic will only garner more focus.

The reality of retirement drawdowns

A recent paper from the Actuaries Institute provides a rule of thumb to help retirees calculate their drawdown. However, the reality is quite different. Research from Centrepoint Alliance and Colonial First State platform data reveals that most retirees across all age cohorts are withdrawing within 0.5% of the minimum required. So, what are the reasons driving this behavior?

 a. Desire for wealth transfer

For some, the purpose of superannuation is not to fund their retirement but rather to provide their children with a large inheritance. A survey of Australian superannuation members found that 80% of people plan to leave an inheritance to their children. The result is that many people spend as little as possible in order to preserve their superannuation nest egg.

 b. Fear driving frugality

For others, there is a fear that they may outlive their savings. This fear is partly based on the unknown – how long a person will live and the level of care and medical support they will need in the future. A Morningstar survey found that most Australians fear that they will run out of money in retirement. One of the reasons for this fear is the general confusion about how much they will have or need in retirement.

The role of the Financial Adviser

As people start planning and moving into retirement, they are looking for confidence that they aren’t going to run out of money. However, for advisers, their current plans are based on using volatility as the measure of risk in a portfolio.

Faced with different priorities, advisers need to have forward looking portfolios that enable them to provide solid advice based on realistic data. These models should take into account the variety of inputs required for any scenario, including contributions, types of annuity products, asset tests for pensions and benefits, and types of protection products.

These types of scenario models would allow advisers to focus on the objectives of their clients, providing advice on capital protection strategies to enable clients to enjoy their requirement lifestyle now and into the future.