Using layers of income to meet the needs of retirees

1. Using layers of income to meet the needs of retirees

2. Meeting the needs of retirees • The needs of retirees • Financial risks faced by retirees • A layer of lifetime income • Using layers for the retirement risk zone • Retirement is different

3. What do retirees actually want? Top 3 wants from 2012 NSA Survey The NSA report is available at: http://www.nationalseniors.com.au/be-informed/research/national-seniors-research-reports • Being able to afford aged care and medical costs • Money that lasts my lifetime • Regular constant income that covers my bare essentials Source Mercer

4. Retirees face extra financial risks The need for cash flow changes the risk • Market risk • Includes sequencing risk • Inflation risk • Keeping up with the cost of living • Longevity risk • The money should last at least as long as the person • Key risks managed outside the investment approach • Behavioural risk • Government policy risk

5. Retirees need more than Age Pension Age pension is a safety net Source, ASFA, Department of Social Services

6. A layer of lifetime income Always meet a minimum standard • Savings will run out at some point in retirement for most retirees • They will still have basic needs after that point • Age Pension may not cover all these ‘needs’ • This creates a need for a lifetime income layer • Need some certainty about quality of life that can be enjoyed • Only needs to top-up from full age pension • Part of the income component of the retirement portfolio • Retirees should have a lifetime income stream • Consider interaction with Centrelinkbenefits

7. Building a layer to cover essential needs Source Challenger Income top up using income from available assets

8. In the retirement risk zone Spend it while you can See work by Higgins and Roberts on spending patterns of older Australians • Retirees want to spend more while they are still active • Desired spending above the minimum level • Travel for holidays or to see family • Entertainment • Simply to enjoy life while they still can in the active stage of retirement • Cash flows expand market volatility into sequencing risk • Need to manage exposure to markets

9. Separate cash flows from volatility Cash flows Investment volatility Sequencing risk Order of returns risk

10. Spending in the risk zone Use a big bucket of money See work by Higgins and Roberts on spending patterns of older Australians • Retirees want to spend more while they are still active • Desired spending above the minimum level • Travel for holidays or to see family • Entertainment • Simply to enjoy life while they still can- the active stage of retirement • Cash flows expand market volatility into sequencing risk • Need to manage exposure to markets • Can use a bucket approach to separate cash flow from income • Need to determine how much to put aside in the first income bucket • account for inflation • adjust for income payments

11. How long does equity take to recover? Australian equity historical data from Brailsford, Handley, Maheswaran (2012) “The historical equity risk premium in Australia: post-GFC and 128 years of data” Accounting & Finance Vol 52, pp237-247. Total returns recover quickly

12. How long does equity take to recover? Australian equity historical data from Brailsford, Handley, Maheswaran (2012) “The historical equity risk premium in Australia: post-GFC and 128 years of data” Accounting & Finance Vol 52, pp237-247. Inflation and income make a difference

13. How long does equity take to recover? Australian equity historical data from Brailsford, Handley, Maheswaran (2012) “The historical equity risk premium in Australia: post-GFC and 128 years of data” Accounting & Finance Vol 52, pp237-247. Need to be patient for a real recovery

14. Multiple layers A bucket in early years can protect income layers Active income layer Future spending Lifetime income layer Age Pension Top-up

15. Layers to meet the multiple objectives Protection for the retirement risk zone A layer to cover basic needs for life Higher spending needs in the retirement risk zone Use different tools for different objectives

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