The cost of living, increased life expectancy and market fluctuations are all factors that impact your client’s retirement wealth. So it’s never been more important for advisers to identify the right strategies and solutions.
MLC works closely with advisers to do this - looking at three key risks to a client’s retirement. These risks are sequencing, longevity and inflation risk. Addressing these risks effectively through a robust financial strategy can protect clients and lead them to a comfortable retirement.
Making sense of sequencing risk
Investors are no strangers to market volatility, but a strong financial plan can help mitigate risks. Sequencing, or sequence of returns risk, is the risk of receiving low or negative returns in the early years of their retirement where they may draw down from their retirement portfolio and increase the potential of running out of money prematurely.
The year your client retires makes a big difference to their wealth
1995 was a great year for your clients to retire. But retiring in 1994 could’ve really set back their retirement savings.
Positive returns before or during the early years of retirement can help provide clients with a sustainable income, whereas a market downturn would reduce the value of their assets available to fund their retirement.
How you can help manage sequencing risk
Think about protecting your client’s capital
By choosing to protect your client’s retirement savings, you can ensure they won’t suffer from sequencing risk, regardless of the year they retire.
With MLC MasterKey Investment Protection – Protected Capital your client can safeguard their investment against sequencing risk by protecting the value of their initial investment, even if the market falls. And, if their investment increases above the initial amount, MLC locks in the gains on the anniversary of their investment start date. MLC MasterKey Investment Protection can provide your client with certainty for their capital for 10 or 20 years, or their income for 10 or 20 years, or for life.
Think about an investment with a risk-management focus
A portfolio managed with the aim of limiting the risk of large investment losses can help mitigate your client’s sequencing risk. The MLC Inflation Plus portfolios target returns above inflation over defined timeframes by carefully managing sequencing and other risks. These portfolios - whether conservative, moderate or assertive, give your client more confidence that they’ll get the above-inflation returns they need to help achieve their financial goals in retirement.
Keeping inflation risk under control
Inflation risk, which is the risk that rising living costs will undermine purchasing power over time, is one of the biggest threats to your client’s retirement. The same electricity bill that cost Australians $100 in 1973 would now cost $295.24.5 And in 15 years’ time, keeping the lights on could cost $1,051.71 if inflation keeps rising at the same rate.
Over time, inflation reduces the purchasing power of your client’s money. But there are ways to manage this risk. As an adviser, it’s important for you to help your clients save now for a more expensive future.
Price change over 10 years to 30 June 2014
Total change in price level
Annual inflation rate6
Water and sewerage
Gas and other household fuels
How you can help manage inflation risk
Choose an investment that targets above-inflation returns
MLC Inflation Plus portfolios aim to deliver returns above inflation over defined time frames, regardless of what global markets are doing. This means you can help manage the risk of inflation and plan a smoother ride in retirement for your client.
Markets are always changing – you can’t simply ‘set and forget’ when you’re investing for your client’s future. As markets change, MLC adjusts the mix of assets in their MLC Inflation Plus portfolios, so they are better positioned to manage risks and deliver returns.
Helping your clients live longer and prosper
One of the biggest unknowns when planning for retirement is how long do we need a retirement income for? On average, Australians will spend a quarter of their lives in retirement – that's around 20 to 25 years.7 But unfortunately, the fact is most people will only plan to the current life expectancy average. If this is all that is planned for, there’s a 50% chance of encountering longevity risk, which is the risk that someone will outlive their wealth and available income.
How long will your clients live?8
At age 60
At age 60 with future improvements
There’s low client awareness around longevity risk, as most people will underestimate how long they’ll live for. It can also be difficult for clients to understand how to convert their retirement savings to an income stream. Therefore it’s important to educate clients on how much income they’ll be able to generate from their lump sum, and this in turn leads to a conversation regarding consumption in retirement.
Living longer is great if your client has the right plan in place to manage their financial future. As their adviser, you can help your client protect themselves from longevity risk by understanding what they’ll need in capital and income for a comfortable retirement – no matter how long they live.
How you can help manage longevity risk
There’s an enormous role you have to play within the advice process to make sure your clients are aware of longevity risk and how they can manage it. If you discuss and plan for longevity risk, and manage sequence risk to protect your client’s income while allowing for growth, you can ensure that your client can live long and prosper.
Protect their income for life
Some retirement income products, such as MLC MasterKey Investment Protection - Protected Income For Life will allow your client to convert their retirement savings into a regular income for the rest of their life, negating the risk of outliving their savings.
Transition to pension
Who says a client needs to retire at 65? Some clients may want to transition to working part time and supplement their employment income with their retirement savings. If that’s the case you could suggest your client takes up a transition to retirement (TTR) pension. A TTR pensions could also be used from age 55 to provide additional income so your client can invest more in super. TTR pensions are available on MLC MasterKey Super & Pension Fundamentals.
Save your client’s future
To help address these various risks, improved awareness and education is needed. Many Australians simply don’t have a sufficient understanding of what these risks are or how they may impact their ability to live comfortably in their later years.
MLC is committed to helping Australians save their retirement. The best way to achieve that is to support advisers in taking up the challenge and becoming retirement conservationists. For more information on the tools MLC offers to support you, please visit mlc.com.au/savethefuture
1 Assumes couple, retiring at age 65 who will live to an average life expectancy of about 85 and desiring a comfortable lifestyle. ASIC Money Smart, August 2014.
2 Source: Australian Bureau of Statistics, 2013, “Retirement and Retirement Intentions”
3 Source: December 2012 Retirement Income Report - Investment Trends.
4 Source: Don Ezra, Bob Collie, Matthew Smith; “The Retirement Plan Solution”, 2009.
5Australian Bureau Statistics CAT No. 6401
6Inflation level is an average based on data obtained from Australian Bureau Statistics CAT No. 6401
7Source: World Health Organisation, Life Tables, 2012 based on current age of 65 years.
8Source: Australian Bureau of Statistics 2008; 2013a, Life expectancy (expected age at death in years) at different ages by sex
This information has been provided by MLC Investments Limited (ABN 30 002 641 661) and MLC Limited (ABN 90 000 000 402) members of the National Australia Bank group of companies, 105–153 Miller Street, North Sydney 2060.
MLC MasterKey Super & Pension Fundamentals and MLC MasterKey Investment Protection are issued by MLC Nominees Pty Limited ABN 93 002 814 959 AFSL 230702 RSE L0002998. MLC Inflation Plus Portfolios are operated by MLC Investments Limited ABN 30 002 641 66 AFSL number 230705.
This communication contains general information and may constitute general advice. Any advice in this communication has been prepared without taking account of individual objectives, financial situation or needs. It should not be relied upon as a substitute for financial or other specialist advice.
Before making any decisions on the basis of this communication, you should consider the appropriateness of its content having regard to your particular investment objectives, financial situation or individual needs. You should obtain a Product Disclosure Statement or other disclosure document relating to any financial product issued by MLC Investments Limited and MLC Nominees Pty Ltd (ABN 93 002 814 959) as trustee of The Universal Super Scheme (ABN 44 928 361 101), and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the Product Disclosure Statement or other disclosure document is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au.
An investment in any product offered by a member company of the National Australia Bank group of companies does not represent a deposit with or a liability of the National Australia Bank Limited ABN 12 004 044 937 or other member company of the National Australia Bank group and is subject to investment risk including possible delays in repayment and loss of income and capital invested. None of the National Australia Bank Limited, MLC Limited, MLC Investments Limited or other member company in the National Australia Bank group guarantees the capital value, payment of income or performance of any financial product referred to in this publication.
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