Jeff Rogers

Chief Investment Officer, ipac Investment Management

The need for a richer suite of retirement products

In this paper we discuss:

Designing appropriate investment strategies for retirees is more challenging today than it has ever been. In the past, nominal and real interest rates were higher while average life expectancy was shorter. Furthermore, a larger number of workers had defined benefit schemes which provided greater certainty over their final account balance and their ability to enjoy a comfortable retirement.

Today, it is a different story. Interest rates are at historical lows and we believe will remain so for years to come, life expectancy is longer and most Australians have modest superannuation balances at retirement. Therefore, in order to improve the likelihood of achieving their retirement goals, retirees need to accept market risk. To this end, most retirees with allocated pensions invest in traditional diversified strategies. However these strategies were originally built with an objective of wealth accumulation rather than consistency of income in retirement. These are two very different propositions.

The investment problem faced by a retiree withdrawing capital is quite different to that faced by an accumulator progressively contributing new capital. Given this, we suggest that there is scope to significantly improve financial well-being in retirement by implementing strategies specifically designed to better match the spending goals of retirees.

We believe that the starting point for any solution is a clear understanding of retirees’ goals and the relative priority attached to those goals. In addition, it is important to understand the flexibility a retiree may have to vary their spending and the withdrawals from their account. In retirement, “how you spend it” may be equally important as “how you invest it”.

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