Australia's ageing retirees risk dying broke, says visiting expert
Australians needs to 'over prepare' for the 'decumulation' phase of their increasingly long retirement
SYDNEY, 7 March 2008 – Global investment firm Russell Investment Group is encouraging Australian investors and super funds to pay more attention to their superannuation investment strategies after people retire - due to the looming problem of people running out of savings well before they die.
Speaking at a Russell Research Roundtable in Melbourne today, Russell's director of investment strategy Don Ezra said the ‘decumulation’ phase of superannuation – ie post retirement, when your super investment is being slowly spent - is often overlooked among superannuation professionals who tend to focus on the ‘accumulation’ phase of building up the retirement nest egg.
“Accumulating wealth before retirement is only half the story. Investors need to focus equally on generating income for life after retirement,” Mr Ezra said. He points to the little known ‘10-30-60’ rule – which breaks down how every dollar spent in retirement will be earned.
“An individual saves a constant percentage of pay from age 25 to 65 then decumulates for around 25 years. Under reasonable assumptions, every dollar decumulated consists of around 10 cents of savings, 30 cents of investment return earned during the accumulation phase, and a whopping 60 cents of investment return earned during the decumulation phase. Most people don’t realise your investment strategy post retirement is proportionately more important,” he says.
The issue is being compounded by the fact that Australians are living longer. Statistics derived from Australian Life Tables show that of those who reach 65, more than one in two Australian women and more than one in three men may go on to live to 90. Furthermore, 15 per cent of women and 9 per cent of men may go onto reach 100.
Ezra explains the spending and investment strategies deployed to generate income after retirement are complicated by longevity uncertainty – investors do not know how long they will live, which adds a new risk dimension that is hard to measure and mitigate.
Also speaking at the lunch was one of Australia’s leading actuaries and Russell director of superannuation Steve Schubert, who said the decumulation super challenge was complicated by the fact that many Australians underestimate how long they will live.
According to Schubert: “Determining how long you need your money to last is a vital component of your superannuation strategy that will impact your standard of living in retirement. Investors cannot rely on the law of averages to estimate longevity. If you’re a self-funded retiree, you’re likely to live longer. And if you want your retirement income to stretch for an extra ten years, you need to squeeze an extra 2.3 per cent each year from your investments – that’s too hard for the average investor to do.”
Ezra says the risk management options for investors are limited, highlighting the need for investors to over-prepare. "Traditional risk management products are limited to lifetime annuities where insurance companies guarantee payments for life for the price of the average longevity by pooling the risks of a large group. However, these products are perceived by investors to give a relatively low return. Investors also lose control of their strategy while the ability to build the children's inheritance is diminished," he said. But he expects the next few years to see the launch of a variety of investment products with innovative features.
Until then, how should investors respond to this challenge? Schubert says the first step is to understand the risk. “The lesson for investors is that longevity uncertainty becomes a greater concern than investment risk the older you get and this should be factored into investment strategies during the accumulation and decumulation phase. Once that is considered, investors should plan for their retirement income to be drawn over a longer period than they probably initially envisaged, and some may need to tap into their residual asset, the family home, via products such as reverse mortgages as a last resort.”
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