Important questions for retirement

Funds Management

by Jessica Amir

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Jason Hazell: Hi, thanks for joining us. Tonight I'm joined by Brian Long to talk about the importance of retirement. Welcome, Brian.

Brian Long: Thanks, Jason. Thanks for having me along.

Jason Hazell: Retirement's very topical at the moment. But it appears to me that a lot of people think about their retirement planning as their superannuation balance, or money in the super system. Is that really the right way for people to think about it?

Brian Long: Jason, it's pretty natural to think that way because in the accumulation system, that's what you really focus on is how much you're going to have at retirement. But it changes at retirement. You've gotta think a little differently, you've gotta think about what is the lifestyle I'm going to want to have and how I will spend through retirement. And you've also gotta think about your wealth outside of super, and for some people your eligibility for assistance from the age pension.

Jason Hazell: So you think people are focusing a little bit too much on super?

Brian Long: I do, Jason, because when you retire, you're basically looking at how much you're going to spend over the course of your life. And, of course, as you go through retirement, you'll find that you have an active stage, where you'll be spending more, you'll have a simpler stage where you'll be spending a bit less, and you may have a supported stage, where you'll be reliant on some help and your health expenses may go up. So it's important to really budget and have a look at those sorts of expenses, and then have a look at how much you need to retire based on a lifestyle, not so much on some sort of hypothetical balance.

Jason Hazell: So just to extend that a bit further, is there a good rule of thumb for how much people will be spending in retirement?

Brian Long: It's a very common question, Jason, and everyone is concerned. Most people are quite concerned about their retirement. Six out of ten Australians don't believe they'll have enough. And really, people... We did a survey, MLC did a survey, and we found that people believe they may need somewhere between $700,000 and $1.5 million, so the range varies considerably.

There are rules of thumb. The ASFA, the Association of Super Funds, came out with a retirement standard that said for a comfortable lifestyle, a couple needed about $640,000 to retire, and that would give them an income of about $60,000 per year, which was considered to be quite comfortable.

Jason Hazell: Given current life expectancy for males and females, how does this help people plan for their retirement needs?

Brian Long: Jason, it's quite important because one of the things you want in retirement is you want a good level of income and you want it for as long as you're going to live. Of course, that's the problem, you're trying to solve for a date that you're not sure of how long you're going to live. So, the industry's focused very hard on longevity products, which are designed to help you for those that will live a long and healthy life. Products such as annuities.

Jason Hazell: With the GFC pretty fresh in people's minds, only about ten years ago, and some people having lost quite a lot of money right in the lead up to retirement, what would you say to people who are a few years from retirement at the moment, and what they should be thinking about?

Brian Long: Jason, it's a very good question because when you're accumulating a super and you're contributing and you're not withdrawing, you're really only interested in the return of the market, on average. But when you retire, the order of returns, which we call sequencing risk, is really important, and your biggest fear is that your superannuation balance will fall at the very time when you're not contributing.

So when people are looking at this, it is a very valid risk and people really need to have a talk to a financial advisor or someone who's a bit of an expert because the industry can provide you with ways to assist you.

Jason Hazell: Do you think this concept of sequencing risk is well enough understood by people who are getting close to retirement?

Brian Long: No, I don't think it is because we're used to just focusing on the average balance and we are not used to withdrawing, but when you're withdrawing, people get very frightened over market fall when they're not contributing anymore.

Jason Hazell: So, Brian, given some of the complexities that exist in our industry, do you think people nearing retirement should be seeking advice?

Brian Long: Yes, I do think people need to seek advice, Jason, because in retirement, people want to maximize their standard of living, they want that income to last for life, they want flexibility, as well. And the problem is those objectives differ from person to person and, to some degree, they're incompatible because the more you spend, the less time that's going to last. It's not gonna last you for life. And if you want to lock money in for life, very often you have to sacrifice the access to your capital. So an advisor will actually look at you and your specific objectives and also look at investment product and try and match those to your objective specifically.

Jason Hazell: Well, many thanks for your time today, Brian.

Brian Long: Thanks very much, Jason.

Jason Hazell: And thanks for joining us.