Can actuaries help solve the retirement advice gap?
Using superannuation to replace your salary when you retire is not easy under a ‘lump sum’ retirement system.
Spend too much and your savings will run out. Spend too little and you’ll forfeit the lifestyle you’ve worked hard to achieve. The balance needs to be ‘just right’ and include techniques that take uncertainty into account.
The biggest retirement decisions – like how much to save and when you can afford to retire – are extremely difficult. These decisions could also be considered actuarial as people don’t know how long they will live or what their investment returns will be.
This means you can’t calculate how much you need to retire, or how much you can safely withdraw from your super each year and be certain you won’t run out of savings later in life.
Adding to this complexity is our means-tested Age Pension. When this applies, the amount of income you get is recalculated (up or down) continuously throughout retirement leading to highly irregular and unpredictable cashflows, particularly for couples.
So how can Australians answer basic questions like:
- How much do I need to retire?
- When can I retire and be financially secure?
- Am I saving enough?
- How much can I safely spend each year in retirement?
I refer to these questions as the Big Retirement Decisions. To answer these questions, you need a very sophisticated financial projection that takes into account risk not at a super fund level but rather at the household planning level.
Most retirees need help with this
For less affluent people, the Age Pension provides a guaranteed lifetime income to cover the bulk of their needs for life.
For the very wealthy, if their living costs are a relatively low percentage of their net worth, sustainability isn’t a problem. Their focus tends to turn to investment management rather than optimising their ‘safe spending’.
But for everyone else, who I refer to as ‘middle Australia’, if their super fund doesn’t offer a ‘lifetime’ product to shoulder these issues, they require significant help to make their Big Retirement Decisions in an informed way and with a high degree of confidence.
This ‘middle Australia’ cohort by far has the most important and difficult financial planning to do as most super funds push all the risk and most of the decision making onto the individual member during retirement.
For retirees wanting a lifestyle that’s more than the Age Pension provides, they really need some form of actuarial control cycle – to optimise what can be achieved from their savings while managing risk.
This cohort of ‘middle Australia’ has to make major trade off decisions that are essentially a combination of lifestyle choices that have a financial dimension to them. For example, working longer to secure a higher or safer living standard. Or spending more in the early years of retirement but with a controlled plan for reducing this lifestyle slightly after say age 75. Or spending more knowing you’ll downsize your home in the next 15 years.
Actuarial techniques are extremely well placed to assist with this. See our article ‘Why we need to lift the current standards of retirement modelling’.
My personal goal is to take skills that many actuaries once provided to defined benefit pension funds (prior to what the UK Institute refer to as ‘The Great Risk Transfer) and ‘mass produce’ them per se to make it more accessible and cost effective to provide actuarial support to the individuals who shoulder these issues.
Current options for getting help
Here are the main options Australians have for obtaining help with their Big Retirement Decisions in 2023:
- Online education
There are a number of great online resources and books for learning about superannuation, the Age Pension and financial matters in retirement. However, the detail and jargon can be daunting and time consuming which creates a barrier to form a clear perspective when making confident decisions. Ultimately, retirement planning decisions also involve financial projections.
- Licensed financial product advisers
Good financial planners can do a great job of dealing with the Big Retirement Decisions. However, only 26% of people aged between 55-64 seek financial advice at retirement. It’s likely many of these customers are wealthier than the average retiree and that the scope of the advice is primarily related to investment management.
However, the ‘funds under advice’ business model that many advisers rely on doesn’t appeal to everyone. The problem for ‘middle Australia’ getting licensed advice is the cost involved and the concern that the advice they’ll receive is less about long-term cashflow sustainability and the ‘levers‘ they have than about investment product selection.
In the wake of the Royal Commission in banking, from December 2018 14,000 of 28,500 financial product advisers have exited the advice industry. The costs of maintaining a license (plus professional indemnity insurance) and delivering advice that complies with the law, as well as the expectations of the Australian Financial Complaint Authority, means licensed advice is not as profitable – apart from that given to wealthy ‘investment advice’ clients.
The recent Quality of Advice Review delivered proposals to cut red tape and expand the number of people who can give personal advice. It is important to note that the government is still considering this. The scope of this review was focused on ‘product advice’ as opposed to the strategic retirement adequacy issues we are discussing.
- Online calculators
In theory, online tools are an obvious solution. Yet in practice they don’t seem to provide sufficient confidence for people making their Big Retirement Decisions. Perhaps this is due to the difficulty and cost of building robust tools that are easy to use in all client situations and adequately deal with risk.
Most current calculators aren’t fit for purpose if the users’ objective is to be confident they won’t outlive their savings. They require users to predict their own age of death and the calculator will then solve how much they can spend per year. But this is based on earning a fixed investment return for life. They ignore the fact there’s an 8-year standard deviation around your life expectancy at retirement and a 6% standard deviation around the average return you might expect on a conservative balanced portfolio!
They also ignore the fact the Age Pension income is highly irregular when your wealth is within the means-testing band ranges. As markets move up and down over time, your wealth level will change and the income you’ll receive from a part Age Pension will move in the opposite direction. Your Age Pension will also drop if your spouse passes away.
Financial reality is far from the neat, straight lines shown on retirement calculators and Australians intuitively know this.
- ’Going it alone’
Unfortunately, it appears for most Australians, they have no choice but to go it alone with their Big Retirement Decisions after gleaning whatever insight they can online or from friends.
To get the confidence they seek, many people work for longer or, once retired, try to spend less to protect their nest-egg from running out.
This is a great shame and a highly inefficient use of resources as part of the reason they do this is because they can’t get the help they need to make confident decisions. The Financial System Inquiry, Retirement Incomes Review and Quality of Advice Review clearly point out the inefficiencies of this and the desirability of solving it.
How actuaries can help
Actuaries are known for their qualified skillset with financial projections, risk modelling, superannuation, lifespan estimation, control cycles – the list could go on and on! We are part of a profession that has survived hundreds of years of economic ups and downs and have built institutions that insure and manage these risks – both historically and globally.
Hopefully, if the Quality of Advice Review’s proposals take shape, Actuaries will be closely involved in helping institutions and super funds provide advice that’s based on proper financial projections that take risk into account and meet Good Practice Principles.
Some of these issues will reduce when super funds offer ‘lifetime’ income streams as well as designing default strategies and/or guidance on how to use these products.
Another initiative to help ‘middle Australia’ is businesses such as Jubilacion launched by Apricot Actuaries in 2021. Jubilacion’s B2C service helps consumers with their Big Retirement Decisions and uses state-of-the-art financial calculators designed in conjunction with actuary David Schneider of 10E24 Pty Ltd. Find out more about Jubilacion here.
 For example: Under the Assets Test a homeowning couple can receive a part pension if their assessable assets don’t exceed $935,000 (excluding the home).
 2019 Australian Financial Advice Landscape, Adviser Ratings [as quoted by Retirement Incomes Review Final Report page 449]
 Quality of Advice Review Final Report pages 38 and chart 5.1
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