The traditional approach of dividing an individual’s life into pre- and post-retirement stages is outdated and needs to be rethought, according to Graham Rich, publisher of Brillient! and conveyor of the PortfolioConstruction Forum Conference.
Rich told the 2013 conference in Sydney on Wednesday that the way of thinking that has prevailed for the past couple of decades has not produced the best results for investors. He said a whole-of-life or lifecycle approach was a preferable way of giving clients the best possible chance of achieving their retirement objectives.
“In many respects it’s true to say… this 60 years… has been, if we’re not careful, a fool’s paradise, because it’s been distinctly different,” Rich said.
“It’s been different from anything else before and yes, we can say that time was different.
And so we see a circumstance where we’ve got people… who are going to end up with smarter, healthier, better lives than any of us could have imagined, but are also going to end up with a whole bunch of challenges that people of my generation have brought them.”
Rich said that this is what “lifecycle investing” is designed to manage “this notion of accumulation and decumulation, of thinking of the whole of a person’s life”.
“So when I say it is, in many respects, going back to the future, what I mean is some of the early notions of accumulation and decumulation or, if you like, a defined benefit, have become distorted over the past 20 years or 30 years by this approach to defined contribution,” he said.
“One of the pillars of our whole Superannuation Guarantee space has, in my proposition, distorted the way we think about issues to do with the whole of a person’s life. So we have this term ‘retirement’ embedded in a way I would suggest… we should be destroying.”
Clients at the centre
Rich said a philosophy of lifecycle investing puts clients right at the centre of the conversation.
“That is, in a sense, what lifecycle investing is all about: consciously constructing portfolios that are continuously dealing with the whole of a person’s life; moving to this defined benefit approach from what we’ve become so focused on – the defined contribution. Not looking at post-retirement and pre-retirement, but looking at the whole of a person’s life.
“Its defined benefit versus defined contribution. It’s maximising outcomes rather than maximising returns. It’s financial independence more than it is retirement. In fact, it’s the retirement of this notion of retirement, and it’s focusing on a total financial independence mindset. It’s accumulation and decumulation.”
Chris Condon, a principal of Chris Condon Financial Services and partner with Peter Vann in CV Solutions, said recasting retirement objectives in terms of an income target changes the conversation between client and financial planner.
Condon said a client’s objective should be couched in terms of the “level of income they have a good chance of getting” given their current age, contribution level and investment strategy.
“It needs to be built up from what they have now, what they are going to save and the Age Pension,” Condon said. “It changes the focus from talking about your account balance to your retirement income.”
Likely retirement income can be assessed periodically, Condon said, and if it’s less than a client wants or needs, there is a basis for a conversation about steps to address it. This may involve reviewing contributions, changing investment strategy or even rethinking the whole approach.
But critically, Condon said, as clients come to understand that their actions can have a direct bearing on their likely lifestyle in retirement, it introduces an element of personal responsibility into the planner/client conversation, and makes it more likely that the client will respond constructively to the planner’s advice and counsel.
