A conversation with a client about retirement income should start not with how much money they’ll have, but how much time they will have.
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Discussing a client’s likely longevity – and unavoidably, therefore, when they’re likely to die – might seem like a morbid sort of topic but David Williams, chief executive officer of My Longevity, maintains that it is a far more useful place to start.
“The first question I suggest the adviser should ask is: Well, how long are we planning for?” Williams says.
How much a client needs in retirement depends on one major independent variable: how long they are likely to live. Simon Hoyle reports.
“The reason is that you start using time as a dialogue, instead of money. Time is a universal dialogue. We don’t have so many hang- ups about it – except for when we might die.
“It’s a universal dialogue. We all have a watch. When we go on holiday we know how long we’re going for, how long we’re going to be away. It’s a natural start to a trusting dialogue. So it’s a good starting question.”
Williams says his experience suggests that “roughly one in four people will cross their arms and say I didn’t come here to talk about that – I came here to talk about my money”.
Opening the retirement planning process with a conversation about time “gives probably the most useful basis for a discussion”, Williams says.
“It can build trust I think, far more quickly than talking about money,” he says.
“Most people are worried about money; they are suspicious and they don’t understand the language. Time is a universal language and it is actually the real independent variable in advice.”
But a key message for all advisers is that “you cannot set and forget”, Williams says.
“As time moves on, so things change,” he says.
“But provided you have got the key assumptions in your advice, then you can examine them with the client and come up with changed assumptions if you both want to. Advice becomes very clearly a process, with you highlighting the variables. It’s not simply choose an investment strategy; it’s more than that.”
BANK ON IT
Banks have launched a fresh assault on the retirement income market, with both Westpac and National Australia Bank launching products that offer many of the recognised features of term deposits and annuity, or regular income stream, products.
While traditional annuities are offered by life insurance companies, and investors enjoy the associated security, so-called “annuity deposits” are offered by banks, and investors enjoy the same security as all bank depositors.
In a nutshell, an investor deposits a sum or principal, at a predisclosed interest rate, for a predetermined term, and with a preset payment frequency (such as monthly or quarterly).
In a statement, Westpac’s head of capital markets solutions, David Van Ryn, said that “a regular income stream is generated from the combination of the interest yield on the deposit and the repayment of their principal”.
“Investors choose a term of up to 15 years over which they want to receive income payments,” Van Ryn said.
The general manager and head of National Australia Bank’s income and investment solutions, John McClusky, says the bank’s first annuity deposit product offers a nil residual capital value (RCV) and the bank is working on variations with different RCV levels.
“This is the first in a line of products where we are looking at other RCVs, such as 50 per cent,” McClusky says.
“A term deposit gets you to an RCV of zero. I’m not sure if we’re going to look at 75 per cent, but we’re certainly going to look at 50 per cent and 25 per cent, based on market demand.
