Advice / Investment

Advisers need more than one approach to retirement planning

The Retirement Income Review released late last year testifies to the strengths of Australia’s retirement system and concludes that the Australian retirement savings model is well developed. But retirement concerns are real, even when people have a sound system to lean on. To help retirees get through the challenging time, financial advisers need not only great communication skills but also a comprehensive toolbox to dip into.

Research shows us that it is common for people to feel unprepared for the transition from employment to retirement. People approaching retirement worry about not having enough to live their desired lifestyle and about the need to work for longer than they wish to fund their retirement.

The COVID-19 crisis has made concerns about the transition even greater. Retirees who adopted a more conservative investment strategy before COVID-19 may have made through it without too bumpy a ride. But many people were caught unprepared when the pandemic arrived and panicked, switching to cash as the market crashed.

A dash to cash

APRA’s superannuation statistics show a significant increase in cash holdings across super funds between June 2019 and June 2020. Cash holdings can change over time for a number of reasons  including active decisions by fund members to switch to cash-based investment options, and asset allocation decisions by funds themselves.

Most noticeably over the period, AustralianSuper’s cash holdings more than doubled, from 8.4% to 19.1% in 2020. Elsewhere, QSuper’s holding increased from 7.2% to 19.8% in 2020, ClubPlus Super’s holding increased from 12.7% to 23.0%, and HOSTPLUS’s holding increased from 4.9% to 12.3%.

To the extent these decisions were driven by member choice, the plight of those members illustrates the multi-faceted nature of risk – in this case, they risk reducing their potential retirement income by not being sufficiently exposed to risker assets through a market recovery. It also demonstrates the potential value of a financial adviser – a steady hand and a guide through uncertain times, to keep a financial plan on-track.

The critical trade-off in retirement investing

People tend to save more as they near retirement, hoping to make full use of the last few years of their working life to top-up their retirement savings. At the same time, their risk tolerance reduces as they get older – retirees have less tolerance for market volatility than younger investors, who have the luxury of time to allow asset values to recover.

But retirement satisfaction is not only about maximising capital.

CoreData research shows that a sufficient and sustainable retirement income stream plays a critical role in retirement satisfaction, along with other factors including home ownership and having a strong relationship with a financial adviser.

Achieving a good retirement outcome requires a careful examination of the trade-off between a conservative and risk-taking approach. Being too conservative on investment reduces retirees’ chances of being hit by another market crash, but it also means they may miss out the opportunity of market growth. On the other hand, a risk-seeking approach exposes retirees to potential market volatility.

The adviser’s retirement strategy toolbox

A report published by Fidelity International in conjunction with CoreData provides a framework to help financial advisers tackle the varied retirement challenges facing clients.

From the simplest approach of maintaining the same strategy as in accumulation phase, to the most complex strategy of dynamically allocating and withdrawing capital based on client needs in a changing environment, financial advisers have a range of options to use depending on client preferences and circumstances.

How effectively these strategies manage investment risks and deliver returns is undoubtedly important to clients, but it is also important to take into consideration clients’ ability to comprehend complex investment strategies, their perception of the costs and benefits, as well as their preferences for frequency of contact.

Click on the table to enlarge.
Traffic light: how well are risks addressed by each strategy
Source: Fidelity, CoreData, Building better retirement futures

Good financial advice is about working with clients to find the solutions that fit them best, both from an objective investment perspective but also taking into account a range of subjective factors.

A one-size-fits-all approach to retirement planning can’t address the many and varied client situations that advisers will encounter from day to day. Financial products are a key part of the solution, but it’s also critical to engage with clients to fully understand their personal and financial goals, their financial challenges and concerns, as well as their personalities that influence their communication styles and their perception of others’ communication styles.

To tackle the challenge of retirement in an environment reshaped by COVID and characterised by investment uncertainty financial advisers also need to have great communication skills as part of their toolkit because after all, advice at its core is about interacting with the individual to help them achieve their specific goals and objectives.

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One Comment

  1. ralphemorgan@yahoo.com.au' R says:

    Unless the client asset allocation strategy during accumulation had been a 100% cash allocation, it isn’t possible to go from “red” to “yellow” inflation risk by allocating MORE of the client’s asset allocation to cash via the ‘bucketing’ or ‘complex bucketing’ strategy.

    Putting more into cash via bucketing is also unlikely to help with longevity risk, unless that extra ‘cash’ bucket is sitting in a lifetime annuity.

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