Everlake Approaching Retirement Guide

Introduction

In this guide we will consider the challenges confronting retirees today, and we’ll also look at some practical strategies for dealing with their concerns.

Our key insight from working with retirees for the last 30 years is that good retirement planning advice should make you feel slightly uncomfortable. Let’s illustrate this point with an example.

Imagine you go to your doctor, and he says that you have high cholesterol, and you are overweight, what would you expect your doctor to say? You would probably expect them to advise you to eat more healthily and to exercise more; they may also refer you to a dietician for practical advice on how to better manage what you eat. Now, this might not be what we might prefer, it requires effort and a change to our established behaviour, but it is certainly what we expect our doctor to advise us to do.

Our doctor isn’t there to tell us that; “it’s ok not to eat healthily and not exercise” and we don’t expect them to. They are highly qualified professionals, and we should expect them to make a comprehensive diagnosis of our health and to prescribe the most clinically effective solutions to deal with any problems they identify based on the evidence before them – it’s called evidence-based medicine.

Now contrast this with the typical experience that we might have when seeking financial advice for our retirement plans. Many clients will present themselves to an advisor and many, if not most, will stress the importance of keeping their capital safe. We know that this is true because 40% of all insured Approved Retirement Funds (ARFs) in Ireland are just invested in cash deposits1 .

Now, unlike meeting with a doctor, many advisors are happy to action the plan you say you want, rather than having a much more difficult conversation with you about what you should really do. This is not to say that the products on sale in Ireland today are totally unsuitable. In fact, all advisors are required to provide advice ensuring that the products they recommend are suitable. But this suitability standard is a lower duty of care than that provided by your doctor.

We are all familiar with the Hippocratic Oath sworn by doctors which ensures that your doctor will always seek to do what is in your best interest and to act as your fiduciary or trusted advisor.

However, Financial Advisors in Ireland are not required to act as your Fiduciary – to step into your shoes and to always do what is best for you.

Consequently, many of the products recommended in Ireland today are therefore focused on capital preservation simply because that is what retirees are mostly asking for. Equally, many of the investment products on sale in Ireland are sold on the basis of commission payments to Financial Brokers and there is a potential conflict of interest between what is best for you and the desire of the broker to earn the highest commission.

It doesn’t have to be this way…

By contrast, we believe that retirement is one of the ‘big rocks’ in your life, like getting married or having children. These are life changing events that require an objective and professional assessment of what is in your best interests. The decisions are too important to be subject to the insidious conflicts of interest presented by the commission-based sales model.

We also believe that the focus for many people should not be on the products used to provide for our retirement such as deciding between an annuity or Approved Retirement Fund (ARF)

Rather, your focus should be on the things that matter to you, like how much income you need in retirement and the things that are within your control like how much risk you take.

The introduction of the Approved Retirement Fund (ARF) was a game changer for the retirement income market in Ireland, moving existing pension savings from a source of income in retirement to a financial planning vehicle. Prior to its implementation many people in Ireland converting their pension fund to an income stream through an annuity contract, often without exercising their Open Market Option to secure a competitive annuity rate2 .

Since the introduction of ARFs, the situation has reversed, with many, if not most people now choosing an ARF.

At the same time, we are starting to see a change in attitude to traditional retirement, with many people now transitioning into retirement (rather than it being marked by a distinct point in time) and looking at their overall assets, including residential property, savings, and pensions to fund their changing retirement income needs at different points during later life.

While the ARF has provided flexibility, it is our belief that for many people, their main aim is to have a pension that provides them with an income which lasts through retirement, ahead of the secondary desire for estate planning for the next generation.

Helping people plan at retirement is very different from helping people save for retirement. In the accumulation phase, people save from income to build capital, usually over a fixed term. With regular saving they can benefit from euro cost averaging. In the decumulation phase, capital is converted to income. The time horizon is unknown and the opposite of euro cost averaging, commonly called ‘euro cost ravaging’ or sequence of return risk, can be devastating.

2 Pension sales inspection reveals significant variations in annuity rates (centralbank.ie)

In this guide we introduce the following four concepts of:

• Personal security - we define personal security as the minimum level of income acceptable to any individual to meet their basic needs.

• Lifestyle security - we define lifestyle security as the desired level of income we would like in order to maintain our quality of lifestyle, i e the cars we drive, where we live, how many holidays we take each year and if we turn left when boarding a long-haul flight rather than turning right.

• Turning success into significance – we define this as your potential desire to use your wealth to make a meaningful difference, either through a legacy to your family or through philanthropy and charitable bequests.

• Aspirational wealth – we define aspirational wealth as ‘keeping up with the Jones’. It is a desire on the part of some to continue to accumulate wealth rather than focus on wealth preservation in retirement.

We believe that these concepts are more meaningful to investors than the typical financial services industry jargon and allow us to ensure that those approaching retirement are able to ensure that their preferences in each of these four areas can be matched to the financial planning solutions that best meet their requirements.

Which is More Important to You - Your Income, or Your Capital?

When Jane Austin described Mr Darcy in Pride and Prejudice, she didn't say that he was worth £2m, she said he was worth £10,000 pa.

We believe that maintaining your Income in retirement is such an important issue for so many people. However, it’s surprising that many people's priority has actually been on maintaining their capital, often at the expense of their quality of life. This tendency was identified by Ron Sandler in the UK3 who was commissioned to review the attitudes of retirees and concluded that many suffered from what he dubbed ‘reckless conservatism’

Our natural tendency to be more conservative as we get older leads many people to focus on depositbased strategies or capital protected products for their savings. However, falling interest rates over the last 20 years or so has meant that the level of income that can be created from a given sum of capital has declined year on year. The graph below shows the average bank base rate in Ireland since the early 1990s which demonstrates this decline

Clearly, today's retirees are very interested in their income, and many are beginning to question the wisdom of a strategy that seeks to preserve their capital through saving the majority of their retirement funds in traditional bank deposits.

3 The UK Government announced a “review of medium and long-term retail savings in the UK” in 2001, and the subsequent review by Ron Sandler was presented to HM Treasury dated July 2002.