Don't ditch growth at 50

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Financial advisers are being told to encourage their clients to hold on to growth assets as they near retirement.

Tuesday, November 4th 2014, 6:00AM 1 Comment

by Susan Edmunds

A Mercer study has found that the average Australian retiree outlived their super savings by five years. In New Zealand, the situation is unlikely to be any better.

Financial Services Council chief executive Peter Neilson said official projections tended to underestimate longevity. In 1982, it was predicted that fewer than 580,000 people would be over 65 in 2021. Now, it’s predicted that the number will be more than 810,000.

Most people would use their grandparents and parents as a reference to how long they might expect to live – and how many retirement years they needed to fund – when it was likely that they would live longer, he said.

People might be saving with the goal of funding 20 to 25 years’ retirement, he said, when it was more likely they might need up to 35.

Advisers should use better projections to help their clients, he said. “If you had thought you were working towards 20 years and could use up capital at a rate of 4% per year to run out at about the right time, that would reduce to 2% if you were planning for 35 years instead.”

Neilson said that illustrated the point that people needed to ensure their investments were not eroded through their retirement years.

“If you have fixed income for 32 years at 6%, the income on that would drop in half in real terms. You can’t give up growth assets at retirement, your income won’t keep pace.”

ANZ’s head of wealth John Body said the issue of longevity and retirement savings planning was often hijacked into one about super eligibility. “I think there are two issues.”

The solution to running out of savings was to increase contributions and focus on better asset allocation, he said.

“Secondly, does this challenge conventional asset allocation wisdom? We have previously thought that people above, say, 50 should have a majority of non-growth assets but with increased longevity this approach may not generate sufficient returns.”

He said it also raised the issue of annuities and whether there was scope for the industry to offer a mechanism for transferring longevity risk.

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