A plan fit for the journey

A long life is a wonderful thing – if you’ve planned for it

When the ‘safety net’ of employment has disappeared, the importance of a sound financial plan is pivotal, says Jeremy Cooper, Challenger’s chairman of retirement income.

Clearly, living longer is more attractive than the workforce for decades, having other option, but it does mean retirees need saved money along the way. to think hard about their financial strategy in The generations after the baby retirement. boomers will mostly have enough of their own There are a few things to remember when thinking about the decumulation phase – think of them as parameters. income they earn in retirement, but also the capital or lump sum they built up, if they want to maximise their retirement income. they reach retirement age, will have been in the money to fund their retirements, without needing A financial strategy in retirement is very different to an inheritance. a strategy ahead of retirement. The first phase, the accumulation stage, which takes place before you retire, is easier. There’s a safety net. If the financial • And, of course, you can’t take your money with you when you go. performance of your accumulated assets, be they Keeping those facts in mind, how do you work in superannuation or outside, don’t match your out a financial strategy for the period you are in expectations, most people can keep working for retirement? a bit longer and rebuild their assets. The hardest part is knowing how long you are going to live. But once you stop working, and This longevity risk is one You don’t. This longevity risk you are in your 60s, or 70s, or 80s, it’s much harder to get a job again. The ‘safety net’ of working more has disappeared. It’s why developing a financial strategy for the decumulation phase of of the toughest pieces of financial strategy in the retirement puzzle. is one of the toughest parts of the financial strategy in the retirement puzzle. Everyone is going to die. We can be confident of that. We just don’t know when we are going to die. your investing – that is your retirement years – is Most financial plans implicitly assume a certain age so critical, and so different to the financial strategy of death, as if it’s known. A woman retiring today at applicable to your working years. age 66, can be expected to live until 90. In reality, Everybody thinks about what to do with their between 81 and 99. money in retirement. But many still think about investing in terms of the accumulation of wealth, not decumulation. If 90 is the age a financial strategy in retirement is based on, then a plan that lasts up until that age will disappoint almost half the population. That’s a poor The goal is to have built a nest egg by the time outcome. retirement arrives, which will be enough, along Not knowing when a person’s life will come to an with the government pension, to enjoy your final end makes managing finances very difficult. Using decades. Note that retirees need to provide for life expectancy figures might make sense initially, but decades – 20, 30-plus years. That’s a long time. in fact are misleading most retirees. • Most people will need to spend not just the • Following from that, their children, by the time around two-thirds of women retiring at 66 will live to So, what’s the solution? You can take your chances, go out and spend, and worry about the future when you run out of money. You will probably be pretty miserable, at least financially, towards the end of your life though. Alternatively, you could be miserly and make sure your money lasts well beyond your life expectancy. The downside is you’ll miss out on plenty of the good stuff between now and then.

A better solution is to have a good plan – a good financial strategy in retirement. That’s something many retirees don’t have. YourLifeChoices’ 2020 Ensuring Financial Security in Retirement survey shows the No.1 concern among retirees is that they will lose their savings as the share market falls. It also highlights several other factors that are more easily addressed than picking share markets. Almost half the people surveyed did not use a financial adviser. Of those who did, an overwhelming majority – 85 per cent – were happy or very happy with the help they received. And two in five incorrectly believed that superannuation offered guaranteed income for life. Super pays income, but the amount and length of time it is available depends on financial markets and how much people draw down, and for how long. Another worry for retirees was fear of outliving their savings. The survey also found that people dislike a loss more than twice as much as they like an equivalent gain. When you put all that together, what does it mean? Every retiree needs a financial plan in retirement. And the ‘Holy Grail’ is a plan that’s simple to understand and easy to implement when shifting from the accumulation stage to the decumulation stage. The plan would consider that people not only live to different ages, but also change the way they behave along the way. As we get older, most of us spend less on travel and other discretionary items. It would include a method to cover everyday expenses – something that gives peace of mind that no matter how long a person lives, they will still have money to pay the household bills. It would recognise that many higher health costs are increasingly paid for by the government and health insurance as people get older. There isn’t as much need to keep money aside for medical emergencies. The plan would take into account what a person thinks is their minimum financial requirement later in life. That’s unlikely to be as much as they needed when they first retired. It would allow them to spend their money without fear of running out. A financial strategy in retirement makes sure people’s regular expenses are covered for as long as they live. Not only does it provide a financial benefit, it also provides peace of mind. And that allows people to enjoy spending in retirement, confident that their money will last.

Jeremy Cooper is Challenger’s chairman of retirement income and focuses on research, public policy issues and thought leadership. Before joining Challenger, he chaired the ‘Cooper Review’ into the superannuation system, and those recommendations have been substantially adopted.

DISCLAIMER: All content in the Retirement Affordability Index™ is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.