Overcoming the biggest hurdle faced by post-retirement product providers

Getting people to acknowledge their needs and embrace the necessary strategies represents a key step in delivering post-retirement products.

The grim fact confronting most Australian baby boomers is that they will live longer than their retirement savings are likely to last.

A range of reports undertaken by government agencies as well as the financial services industry has argued for changes to Australia’s taxation structure, not only to encourage people to maximise their contributions ahead of retirement, but to provide products capable of sustaining them in the post-retirement period.

According to MetLife senior vice-president and behavioural economics expert Joe Jordan, at least a part of the answer lies in getting people to understand the challenges which will confront them.

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In a paper published in 2011, along with fellow MetLife specialists Dan Weinberger and Joel Franks, Jordan argues there is clearly a large gap between people’s understanding of their position as savers, saving for retirement, and the risks and challenges they will face as they become their own income provider during retirement.

He argues that financial advisers can play a key role in helping bridge this gap.

In Australia, there are those currently arguing that superannuation funds can also assist in bridging the gap via both an educative approach and the delivery of suitable post-retirement products.

According to Jordan and his colleagues, psychology will play a key role in helping people come to terms with the post-retirement environment.

What almost everyone signals that they want is a retirement income that helps them maintain their lifestyle by keeping pace with inflation – the trick for financial advisers and superannuation funds in Australia will be educating clients and members on how to sustainably achieve this.

As part of their analysis, Jordan and his colleagues utilised research undertaken by MetLife which revealed the complex psychology of retirees coming to terms with what they really wanted in retirement.

The MetLife research asked retirees what they believed to be most important – money, medicine, meaning or place?

The research found that, at all ages, ‘meaning’ ranked highest and increased in importance as people aged.

It defined ‘meaning’ as being a reflection of how people feel and what is emotionally important to them.

Jordan and his colleagues said this finding suggested that people approaching retirement were seeking more than just income, and furthermore, that they were keen to be directly involved in finding an appropriate solution to their post-retirement needs while understanding the risk factors they faced.

They suggested these people were seeking solutions that ‘felt right’, relative to their unique retirement mindsets.

Jordan and his colleagues suggested that because of this underlying psychology, it was important for advisers to understand people’s retirement mindsets as well as their reality of their actual financial positions.

The MetLife team cited research completed in September 2010 which asked 2,017 adults aged 18 and up a series of questions regarding their understanding of retirement income.

It also asked them whether their advisors had supplied them with adequate information on the topic.

Among the key findings of that research exercise were that, looking specifically at the responses of 808 people aged between 50 and 70 (close to or in retirement), the survey supported the idea that a gap existed between perceived knowledge and real understanding as they faced the issues associated with generating retirement income from savings.

It found that 40 per cent of the respondents thought they understood the difference between accumulating their retirement savings and income generation from those savings.

However, 42 per cent were also unclear, with 27 per cent neither agreeing nor disagreeing, and 15 per cent disagreeing.

Eighteen per cent of respondents said they did not believe the statement applied to them – which the research suggested implied that “perhaps they are completely unprepared and without savings for their retirement and potentially relying only on government”.

Importantly, however, the research found that 28 per cent of respondents would be willing to give up access to some savings in exchange for a predictable lifetime income.

It said this lower number demonstrated perhaps that the respondents did not understand the potential length of their retirement – a period which could last over 30 years; “a clear disconnect to their perception that they understand the difference between accumulation and distribution of savings”.

According to the MetLife analysis, the following represents the key risks in retirement:

Longevity Risk

A couple, both 65, have a 50 per cent chance of at least one of them living 30 years.

Life expectancy has soared in the last century and it will continue to increase. Retirement income streams that last as long as a retiree lives are critical.

Inflation Risk

The possibility that the income received will not cover the expenses we have in retirement means the possibility of not only lifestyle expense cutbacks but compromises on essential expenses as well.

Sequence of returns risk

The accumulation strategy of Dollar Cost Averaging (buy all the time, so down market purchases buy more shares that will grow when the market rebounds), becomes Reverse Dollar Cost Averaging (shares are sold to generate income in up and down markets, but shares sold during down markets cannot grow when the market rebounds).