Financial planners need a clearly defined advice philosophy for retirement income planning and above all, it must be contemporary, says John Carnevale, general manager of advice services, Challenger Limited.
“Is your retirement income philosophy contemporary? I’m not saying there’s one right or wrong answer, but it’s an issue that the whole industry is grappling with,” said Carnevale, challenging advisers while presenting at a Financial Planning Association (FPA) roadshow in Perth on Friday.
He believes many financial planning dealer groups that have traditionally used similar model portfolios for both accumulation and retirement planning are rethinking their approaches.
Carnevale also believes financial institutions are increasingly viewing retirement planning as a separate discipline, and resourcing their executive teams accordingly.
“A lot of the big institutions are employing general managers on retirement income and advocacy so that they can put together a philosophy of what their game plan is.
“I believe that retirement advice is a distinct discipline in its own right [but] many of us have grown up [within the industry] providing a lot more accumulation advice than retirement advice,” he said.
This is changing largely in response to the large-scale demographic shift in Australia, representing a challenge for financial planners but also a huge opportunity.
In around 10 years, 40 per cent more financial planning clients will be beyond 65 years of age than today’s mix of clients. The number of clients over the age of 85 will quadruple over the next four years, and 50 per cent will live beyond the average live expectancy, said Carnevale, referring to figures from the government’s Intergenerational Report.
“Typically your average client today will have a superannuation balance of around $150,000 in retirement. In 10 years’ time, that will be around $450,000. A lot more of your clients will want to seek advice with that sort of money.
“In 2014, $60 billion moved from accumulation to retirement phase, in 10 years time that’s going to triple to around $190 billion. Retirement assets are going to represent 35 per cent of the superannuation assets in the system,” Carnevale said.
Key differences
Carnevale outlined what he believes are the key differences between the advice appropriate for retiree clients versus accumulation clients. “Generally speaking, you’re providing comprehensive advice rather than modular or defined benefit advice, for example, on social security, taxation, estate planning, aged care, cash flow and risk management.
“You’re dealing with different time horizons – an active phase, a passive phase and an aged care phase,” he said.
Timeframe is another major difference, with the timeframe for retiree clients generally uncertain. “How long are we planning for? Is it five, 10 or 15 years? Are you projecting out to average life expectancy or are you going beyond?”
Planning methodology
In advising retiree clients, an approach that establishes a generalised safe withdrawal rate of around 4 per cent per annum has been quite popular in recent years, particularly within the United States. This stipulates that if clients are investing for a period of around 25 years, and hold growth assets, if they draw down 4 per cent of their capital annually, there is a 98 per cent chance their capital will not be exhausted over that time period.
However, this probability-based approach has been questioned extensively in reports prepared by industry consultants such as Ernst & Young and Pricewaterhouse Coopers.
Carnevale outlined what he termed a “safety first approach” for retirement income planning, using income layering. These layers include a base fund for essential expenditure, a contingency fund, discretionary funds and if required, a layer to satisfy needs around estate planning.
“In a probability-based approach, [goals] are not prioritized, whereas in a safety first approach… you’re starting off with basic needs and shoring up essential income which is non-negotiable. You’re matching assets to liabilities and ensuring the right level of risk is associated with them.”
