From our latest Newsletter:
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How times have changed…
Many people who felt they were cruising into retirement may not feel so confident any more. For many people, the market downturn came at the worst possible time – spreading a wave of anxiety that carried the prospect of more years in the workforce. Or even worse, running out of money.
According to consultancy firm Milliman, 60% of baby boomers are worried about running out of money (Milliman Retirement Survey, November 2008). No doubt this figure was lower pre-downturn, when the investment world felt immeasurably more comfortable. But even back then, despite the prevailing optimism, it’s hard to imagine how many pre-retirees were adequately prepared for what lay ahead.
That’s because there are two considerable risks facing tomorrow’s retirees – longevity risk and market risk.
Risk 1 – Longevity risk
Longevity risk, or the risk retirees will outlive their savings, is a relatively new challenge facing retirees – mainly because of the dramatic increase in life expectancies over the last couple of decades.
In 2008 there were 3,377 centenarians in Australia (Australian Bureau of Statistics population projections, 10 September 2008) . They’re rare enough that you’d be lucky to hear the word ‘centenarian’ once in a year of nightly news broadcasts. By 2040, as baby boomers approach 100, it’s anticipated there will be 58,411 of them. This increase is partly due to sheer weight of numbers, but there’s much more to it than that.
With improved medical care, and the ability to afford it, retirees will push the age boundaries to a point they’ve never been before. According to the latest ING Australia research, for a couple aged 60 today, there’s a 50% chance one partner will live past 90 years of age, and a 22% chance one will live past age 95 (ING Australia mortality tables 2009) . When you consider that life expectancies are still increasing, these estimates are probably conservative. The statistics are also likely to be higher for people in higher socio-economic status groups – which is the typical Independent Professionals (IPros).
While no one knows precisely what retirement will look like, or how long it will last, longevity is certainly something every couple should be planning for.
Risk 2 – Market risk
A survey by Milliman found that 89% of Australians aged 55 to 64 worry that inflation and a market downturn will return to wipe out their retirement funds. Given the magnitude of the market downturn, it’s only natural for pre-retirees to be cautious at this point. After all, many have seen 20% to 30% wiped from the value of their nest egg.
But is shying away from market risk going to help retirees achieve their lifestyle goals for what could be 30, or even 40 years out of the workforce? Clearly the answer is ‘no’ for most Australians.
Shifting towards a more conservative investment strategy during retirement can only increase the risk of running out of money.
With retirement getting longer, the need for maintaining exposure to growth assets – even well into retirement – is becoming increasingly common. But after a period of market volatility like we’ve had, it may be a bitter pill for many pre-retirees to swallow.
The challenge facing retirees is how to overcome market risk, and longevity risk, at the same time.
Which path will your retirement follow?
Looking back at over the past 100 years, how long a person can fund their retirement was dramatically impacted by the year they retired. Take 1970 for example, where an individual’s savings would have depleted in 15 years. If they retired just five years later in 1975, their savings would still be going – showing just how difficult it is to accurately project your income.
In fact over the past 100 years, more than half of the scenarios charted would have run out in under 30 years.
Never mind the risks, I want the lifestyle
Data: $500,000 invested in a diversified, multi-sector balanced portfolio comprising 25% Australian shares, 25% International shares, 30% International bonds and 20% Australian bonds rebalanced annually. Historic retirements commence in 1875 and every 2nd and 5th year thereafter until last commencing in 1985. Each portfolio funds an initial 5% drawdown in year one, thereafter an amount adjusted by historical average inflation of 3% Inc 1.8% fees. Source: Wealth benchmarksTM.
Having lived the bulk of our lives through a period of prosperity, we are retiring with lifestyle expectations that far exceed those of our parents. High on the agenda are travel, entertaining, eating out and we don’t want to be told we’ll need to adjust our expectations downward just because we’ve retired.
From an emotional perspective, certainty of income is clearly important to tomorrow’s retirees. This certainty of income is one of the reasons many people lean towards more conservative investment strategies as they approach retirement – regardless of the fact it may actually be detrimental in the long run.
Get Free Advice
Given the recent market downturn and the prospects of a longer retirement it has never been more important to plan for retirement to help ensure it is enjoyable!
All current Entity Solutions IPros are eligible for a free no obligation appointment with a Financial Planner. To enquire simply contact your Customer Executive.
Warning Information Only
The enclosed information is provided as an information service only and should not be relied upon as a substitute for financial product advice. None of the information takes into account the investment objectives, financial circumstances or investment needs of any particular investor. You must therefore assess whether it is appropriate in light of your own individual circumstance, to act upon the relevant information. It is advisable that you obtain professional financial advice before making any investment decision based on the information provided above.
Acknowledgements
This ING Australia article has been reproduced with the permission of ING Australia.
