Asset allocation calculator launched

Variable annuity provider Lifetime has designed a calculator to help determine how assets should be allocated to maximise retirement income – but there’s a warning it may still face an uphill battle with some advisers.

Friday, September 14th 2018, 6:00AM 5 Comments

by Susan Edmunds

The calculator was developed in partnership with the actuarial team at Victoria University.

Lifetime founder Ralph Stewart said it had taken a year to build. It is based on Morningstar assumptions.

“It’s designed to illustrate how combining asset classes can increase returns, mixing and matching assets to maximise your retirement income.”

He said it was the first of its type in the market and was a tool for “informed investors” at this stage. It would suit advisers but would need to be simplified for the wider public.

Liz Koh, who was involved in the development of the calculator, said the work had shown that about a third of a person’s portfolio was the optimal level for insured income, with shares, bonds and cash on top of that.

She said, if an adviser was designing a portfolio for someone, they could use it to see what would be the best solution for that individual.

Stewart said the calculator was product agnostic.

Koh said, while there had been some interest from advisers in placing clients in Lifetime’s product, and the calculator might help them, there were limitations.

“Advisers are very protective of their funds under management. There is a different remuneration structure for advisers with the Lifetime product. In my view that shouldn’t impact on the optimal decision for the client because advisers have a duty under the law to put the client's interests first. But there are some advisers who don’t like to see their funds under management disappear from under them.”

She said Lifetime's was also not a product that fitted easily on to a portfolio management system and would create an extra level of fees for clients. “It can be a bit of a barrier. When people talk to advisers about the product they need to be aware that may influence the adviser’s recommendations.”

You can see the calculator here.

Tags: Lifetime Ralph Stewart Retirement Income Group

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Comments from our readers

On 14 September 2018 at 8:31 am Bobby said:
That sounds a little odd to me. Obviously there is nothing new in optimising a portfolio for risk and return. The bit that throws me is focusing on "income". I don't get how this works. For example, if you pick global shares, what is the income level? Is it the dividend yield on the shares? If the global shares are held through an Australian unit trust which distributes all dividend income and the realised gains, then how does this get taken into account? Maybe Ralph can comment and throw a bit of light on this?
On 14 September 2018 at 10:29 am Murray Weatherston said:
Hi Bobby
I think in the retirement "income" debate, the word income does not have the same meaning as in the normal income/capital debate (going aboreal, capital is the tree while income is the annual fruit crop).
Retirement "income" is used to represent cash from either income or capital or both.
Analogously an annuity is often regarded as income when the investor has paid over their capital in return for a stream of future payments.
On 14 September 2018 at 1:35 pm said:
Bobby/Murray - thank you for commenting.

Bobby - yes much debate with then university over "income" and asset appreciation rates.

Murray is correct the fundamental logic is premised on the belief that for most retirees (>50%) for the foreseeable future earnings on their savings is insufficient to provide a liveable retirement income. Accordingly the calculator optimises the volatility of a given asset class, it's likely return, your age, your mortality to access at what rate you could draw down capital and not run out of cash before you pass away.

Please not the link in the article to the calculator is incorrect - here is the correct one

best Ralph
On 15 September 2018 at 3:16 pm Bobby said:
I love a calculator that always concludes the client should buy the provider's product! I am going to get me one of those. I couldn't get it to come up with a scenario that I didn't need the Lifetime's solution. To be fair I only tried about 30 combinations.
On 17 September 2018 at 2:31 pm James Sheridan said:
To some extent, in my opinion, the longevity risk that is being mitigated via ‘income insurance’ is expressed in a USA context were running out of funds is ruinous at say age 90 when little government funding is available for medical assistance, dementia care or end of life care.

In the New Zealand context these services are provided by the state with the exception of dementia care where average length of stay (ALOS) is about one year according to Dementia care maximum contribution rates are around $50,000 depending on region. This should be part of a sufficiently funded plan.

The other major factor is NZ Super. This New Zealand phenomena is a longevity risk mitigation as it pays until death. Many of us will know aged Clients of all social economic backgrounds that have sufficiency with NZ Super in the later years such as age 90+ when ‘income insurance’ is kicking in.

Our own Commission for Financial Literacy stated that “To some extent New Zealand Superannuation has excused those planning for retirement from the need to estimate their own life expectancy”. Although, is does go on to say that more longevity risk protection is needed possibly via KiwiSaver so NZ Super doesn’t have to take all the strain.

So, we have NZ Super which may suffice as a longevity insurance for most. There could be cases it is not, such as retired folk with savings but no house who required surety too pay rent. Some other Clients may get more comfort from an element of insurance in this space too.

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