Transcript Document

Using layers of income to
meet the needs of retirees
Meeting the needs of retirees
Retirement is different
1. The needs of retirees
2. Financial risks faced by retirees
3. A layer of lifetime income
4. Using layers for the retirement risk zone
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What do retirees actually want?
Top 3 wants from 2012 NSA Survey
• Being able to afford aged care and
medical costs
• Money that lasts my lifetime
• Regular constant income that covers
my bare essentials
Source Mercer
1. The NSA report is available at: http://www.nationalseniors.com.au/be-informed/research/national-seniors-research-reports
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Retirees face extra financial risks
The need for cash flow changes the risk
Market risk
• Includes sequencing risk
Inflation risk
• Keeping up with the cost of living
Longevity risk
• The money should last at least as long as the person
Key risks managed outside the investment approach
• Behavioural risk
• Government policy risk
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Retirees need more than Age Pension
$45,000
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
$5,000
$0
Sep-03
Mar-04
Sep-04
Mar-05
Sep-05
Mar-06
Sep-06
Mar-07
Sep-07
Mar-08
Sep-08
Mar-09
Sep-09
Mar-10
Sep-10
Mar-11
Sep-11
Mar-12
Sep-12
Mar-13
Sep-13
Annual payments (singles)
Age pension is a safety net
Age Pension
Source, ASFA, Department of Social Services
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ASFA Modest
ASFA Comfortable
A layer of lifetime income
Always meet a minimum standard
Savings will run out at some point in retirement for most retirees
• They will still have basic needs after that point
• Age Pension may not cover all these ‘needs’
This creates a need for a lifetime income layer
• Need some certainty about quality of life that can be enjoyed
• Only needs to top-up from full age pension
• Part of the income component of the retirement portfolio
Retirees should have a lifetime income stream
• Consider interaction with Centrelink benefits
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Building a layer to cover essential needs
Income
Minimum income needs
Securing minimum income for life
Income top up using income from
available assets
Increase in part pension as assets
decline over time
Time in retirement
Age Pension
Source Challenger
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Top up income
Lifetime layer
In the retirement risk zone
Spend it while you can
Retirees want to spend more while they are still active
• Desired spending above the minimum level
– Travel for holidays or to see family
– Entertainment
– Simply to enjoy life while they still can in the active stage of retirement
Cash flows expand market volatility into sequencing risk
• Need to manage exposure to markets
See work by Higgins and Roberts on spending patterns of older Australians
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Separate cash flows from volatility
Cash flows
Investment
volatility
Sequencing risk
Order of
returns
risk
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Spending in the risk zone
Use a big bucket of money
Retirees want to spend more while they are still active
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•
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•
Desired spending above the minimum level
Travel for holidays or to see family
Entertainment
Simply to enjoy life while they still can- the active stage of retirement
Cash flows expand market volatility into sequencing risk
• Need to manage exposure to markets
• Can use a bucket approach to separate cash flow from income
Need to determine how much to put aside in the first income bucket
• account for inflation
• adjust for income payments
See work by Higgins and Roberts on spending patterns of older Australians
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How long does equity take to recover?
Proportion market NOT recovered
Total returns recover quickly
Proportion of time that Australian equity market has not
recovered peak after a fall
30%
25%
20%
15%
10%
5%
0%
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3
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Number of years from market peak
Australian equity historical data from Brailsford, Handley, Maheswaran (2012) “The historical equity risk premium in Australia: post-GFC
and 128 years of data” Accounting & Finance Vol 52, pp237-247.
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How long does equity take to recover?
Proportion market NOT recovered
Inflation and income make a difference
Proportion of time that Australian equity market has not
recovered peak after a fall
30%
25%
20%
15%
10%
5%
0%
2
3
4
5
6
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Number of years from market peak
Nominal Accumulation
Real Accumulation
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Nominal Prices
Australian equity historical data from Brailsford, Handley, Maheswaran (2012) “The historical equity risk premium in Australia: post-GFC
and 128 years of data” Accounting & Finance Vol 52, pp237-247.
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How long does equity take to recover?
Proportion market NOT recovered
Need to be patient for a real recovery
Proportion of time that Australian equity market has not
recovered peak after a fall
30%
25%
20%
15%
10%
5%
0%
2
3
4
Nominal Accumulation
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6
7
8
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Number of years from market peak
Real Accumulation
Nominal Prices
Australian equity historical data from Brailsford, Handley, Maheswaran (2012) “The historical equity risk premium in Australia: post-GFC
and 128 years of data” Accounting & Finance Vol 52, pp237-247.
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10
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Real Prices
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Multiple layers
A bucket in early years can protect income layers
Active income layer
Future
spending
Lifetime income layer
Age Pension
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Layers to meet the multiple objectives
Protection for the retirement risk zone
A layer to cover basic needs for life
Higher spending needs in the retirement risk zone
Use different tools for different objectives
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