Retirement income adequacy has moved to the forefront of both individuals’ and policymakers’ minds as the economy teeters on the brink of recession and many retirees are left to consider whether their hard earned savings will suffice in the wake of the global financial crisis.
But according to Harry N. Stout, chief executive officer of ING Australia, bear market risk and its impact on savings is only part of the retirement adequacy story.
Rapidly changing demographics and increasing longevity will compound the aftermath of the global financial crisis, with Australians aged 65 and above the fastest growing demographic cohort in our society today, he says.
This age group will account for nearly 21 per cent of the total population by 2027.
“If you think about it, ageing Australians face a number of real retirement security risks that they and the government need to plan for,” Stout told an Investment and Financial Services Association member luncheon in Sydney on Monday.
“First, although they are saving through superannuation there is no guaranteed income level assured when they retire,” he says.
“Second, long-term investment performance may be significantly lower than expected and may eat into future retirement withdrawals. Third, they may encounter another bear market such as the one we have experienced since November of 2007, which depending on their age can be devastating.
“Who will step in to guarantee investment shortfalls will be made up in some way?”
In addition, Stout says there is a risk that inflation may rise higher than expected during retirement and larger savings withdrawals will be required to maintain desired standards of living.
The ultimate risk is that future retirees could outlive their retirement assets as the miracles of modern medicine and lifestyle improvements lengthen life expectancies.
While these factors present major challenges for state and federal governments, the compulsory superannuation and social security systems, and for the investment and financial services industry, Stout believes they also present a huge opportunity for planners.
Demand for solutions that guarantee income for life is growing in places like the US, Japan, Northern Asia and in Europe, to meet the needs of ageing populations, he adds.
“At ING Australia, we firmly believe there will be an increasing demand by Australians for retirement security products in the years ahead,” he says.
“I believe these products will establish the foundation of a new opportunity for financial advisers to assist consumers increasingly looking for income protection products that provide security throughout the stages of retirement. Once the current turmoil in global financial markets has subsided, we believe there will be a demand for products that provide certainty and stability right throughout an individual’s retirement years.
“As I said to Ken Henry from the Treasury only last week, even in an optimistic culture such as Australia, our customers’ immediate focus has changed from seeking a return on their principal to a return of their principal.”
Stout believes legislative action is required to make these products and integral part of Australia’s regulatory, solvency, tax and social security frameworks.