In its latest report, Towards a Retirement Income Philosophy, Allianz Retire+ argued the need to formulate a formal retirement income philosophy, creating foundational resources to help provide consistency for advisers navigating the unique complexities that arise when managing client retirement income.
“The time for the retirement income philosophy concept to become mainstream is therefore now,” the report said.
The retirement income philosophy should address four key criteria, according to the report, the first of which is the unique or more pronounced risks faced by those in the decumulation phase, such as inflation eroding the spending power leading to larger drawdowns and ultimately, the potential to run out of money.
Additionally, the report noted the risk of increased or unpredictable spending in retirement, including health-related expenses, major home repairs or even “grey divorce”.
Furthermore, the report noted research by National Seniors that found 70 per cent of pre-retirees would become at least somewhat more conservative in their risk appetite at retirement, indicating a need to transition their investments once they leave the accumulation phase.
The second criteria noted in the report is the need for a more nuanced approach to risk profiling once a client reaches retirement, stating that some of the techniques used to assess risk for accumulators are “inappropriate” for decumulation scenarios.
For example, the report suggested that there is too much focus placed on a client’s reaction to portfolio losses rather than the changes in the size and stability of income flows, despite the latter being increasingly important once the client reaches retirement.
Additionally, the firm suggested a number of retirement income strategies that could be used to manage a client’s retirement savings, including the protected income, total return, risk wrap or bucketing approach.
Finally, while many Australians fund their retirement via the government-issued age pension alongside their superannuation, the report suggested that the number of completely self-funded retirees is expected to grow in the coming years.
As a result, advisers will need to develop a layered approach to retirement funding, using a combination of term annuity, account-based pensions and lifetime income solutions, in addition to the age pension, to ensure their clients have a secure and steady flow of income in their later years.
As the global economic environment remains somewhat unpredictable, the report pointed to lifetime income solutions as a necessary safeguard, providing peace of mind for those in fear of running out of money.
While it is widely accepted that planning for retirement earlier is better for clients in the long run, the majority of advice clients are still aged between 50 and 60.
However, the firm said that next-generation income solutions reward clients who secure them earlier in life, giving advisers an opportunity to engage younger clients.
Speaking on the findings, Allianz Australia Life Insurance chief executive Adrian Stewart said it is essential for advisers to develop a more consistent approach to retirement planning for the coming wave of Australian retirees.
“Retirement planning, with its inherent complexities and emotional challenges, demands advisers have specific expertise, empathy and the right tools,” Stewart said.
“If advisers are to continue to play their central role in facilitating an optimal retirement income system, then their ability to evolve and develop retirement income strategies efficiently, consistently and transparently, is paramount.
“In the same way that investment insurance philosophies are foundational resources for advisers and advice practices, driving more efficiency and consistency and quality outcomes for clients, the time is now right for the retirement income philosophy concept to become mainstream.”
