Retirement is different
As Cuffelinks celebrates five years of publishing, I have chosen five of my favourite articles over that time, all of which deal with the ‘retirement income challenge’ one way or another.
To illustrate what the articles were about, consider the example of the age pension. Age pension payments arrive every 14 days. They are exact in amount and unambiguously spendable. Twice a year, the payments are adjusted to ensure that they meet inflation, wage and living standard benchmarks, but are otherwise stable. The age pension is risk-free (from investment markets, although it is susceptible to policy changes) and lasts for life.
The Cuffelinks articles deal with the myriad issues that flow from the fact that the most common retirement-phase products have precisely none of those features.
The Yin and Yang of retirement income philosophies, written in conjunction with the American College’s Professor of Retirement Income Wade Pfau, outlines two schools of thought on the retirement income challenge: probability-based and ‘safety-first’. The safety-first approach is about securing essential spending needs in retirement, with room for more probability-based approaches for discretionary spending.
In the article, Three crucial mistakes about life expectancy, former Co-Chair of global consulting for Russell Investments, Don Ezra, pinpoints the common pitfalls that people make about life expectancy. People have difficulty understanding the arithmetic. Also, it is not just that we are living longer, but the fact that we don’t know exactly how long we will live that complicates retirement income planning.
Nobel Laureate Robert Merton picks up on the theme of income certainty in retirement. His thoughts were recorded by Alan Hartstein in Deriving an effective retirement income, following Merton’s visit to Australia in 2016. Merton argued that super funds need to focus on strategies that manage income risks throughout the retirees’ life. He characterised these as largely consisting of interest rate risk and inflation in the years leading into and in retirement.
Some super funds have woken up to this challenge. How VicSuper evolved its retirement income model was a timely piece from CEO, Michael Dundon, on how VicSuper implemented an income layering approach as a protection against longevity risk and sequencing risk. The approach involves identifying needs and wants and creating a secure layer of income above the age pension to meet essential spending needs.
We round out our retirement journey by looking at aged care. In a very personal account, Lessons from my Dad, in and out of aged care, Alex Denham provides a poignant and evocative window into the human impact of aged care and how even being a recognised expert in the area sometimes isn’t enough to avoid some of the pitfalls.
Importantly, this selection of articles highlights that genuine retirement income solutions must always have the end customer in mind. The authors consistently reinforce this reality, rather than getting stuck on investments and products that are just a means to an end, rather than the end itself.
Jeremy Cooper is Chairman, Retirement Income at Challenger Limited, former Deputy Chair of ASIC including Chair of a comprehensive review of Australia’s superannuation system (the Cooper Review).
A PDF version of this edition is available here.