Australian retirees lack confidence

-- | 21/11/2018

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Glenn Freeman: I'm Glenn Freeman from Morningstar and I'm talking today to Jonathan Shead from State Street Global Advisors.

Jonathan, thank you very much for your time today.

Jonathan Shead: Pleasure.

Freeman: In recent times, State Street has put out a global retirement reality report. It's a survey that you've done of Australians into what their expectations are in retirement and how well prepared they are. Now, how well do investors understand things like the retirement income pensions?

Shead: That's a very good question. I mean, we found when we spoke to, both people in the workforce and retirees that there wasn't a huge amount of confidence about what's going to happen to them in retirement. And I think that one of the reasons for that lack of confidence is because of the complexity of what retirement means. So, if you speak to someone in the workforce and you say, are you confident about your finances in retirement, they have to do this mental calculation to say, oh, what was my last superannuation account balance and what's my pension entitlement going to be and how do I convert my balance into income, is that going to be enough for me to live on its own.

So, I think, there's an understandable lack of confidence in pension generally and retirement in Australia. Australia is not unique. That's a global phenomenon that we've seen. So, it's a real challenge, I think, for us in the financial services industry to overcome.

Freeman: And Jonathan, one of the key areas that you guys cover is in exchange-traded funds and index investing. And are these types of products part of the government's planning for this comprehensive income products for retirement or super process that's still ongoing at the moment?

Shead: Yeah, that planning that the government is doing is still, at this point, quite early. So, it would be a mistake to rely too heavily on what we know so far. I think the key message from the government is less about index investing versus active investing or managed funds versus ETFs. The government is more interested in the whole retirement package. The government has made it clear that they are interested in things like annuities or annuity-like products. So, the government is interested in long-term stable kind of outcomes. I think where we think that products like ETFs will fit in with that broader package is that when you reach retirement, there's a real tension. And there's a tension between, first of all, the need to actually find income.

To, give you a simple example, if you're travelling overseas and you're planning your spending over three months, income has got nothing to do with it. You're going to use up your capital that you've saved for your holiday and you divide three months by 3 and that gives you your monthly budget. But when you are retiring, this is money that potentially has to last for 10 or 15 or 20 or, given we are all living longer, 25 or 30 years. Now, in that environment, the income that you earn is crucial to what you achieve in retirement. So, the government's focus on your income throughout retirement has all sorts of implications for the kinds of products that people use.

Freeman: So, I guess, they are not purely looking at the post-retirement, even though it's a product that people will start to leverage once they retire, that accumulation phase is also part of it, and I guess that's where people need to – difficult types of investment vehicles like index-based options, like ETFs will actually have some sort of consideration within the portfolio.

Shead: Yeah, there's definitely a transition. So, if you think about the default structure in accumulation in most large funds, it's something a little bit like that. So, most investors will probably have a financial advisor to help them plan their retirement. We certainly think that's advisable.

But just in the background, there will be, kind of, a default structure that if you want a large fund to make your choices for you, that's kind of what the government has in mind. But think when we look at how income in retirement works, one of the tensions is, it's very hard to find income at the moment. Interest rates are so low. You're lucky if you get 1%, 1.5% in your bank accounts, term deposits maybe bit over 2% if you are lucky in the current environment.

Freeman: And bond yields are also just not delivering?

Shead: Exactly. Bond yields aren't delivering. And in fact, of this income that you are going to need for this long period in retirement is actually in what historically have been risky assets. So, it's in things like share market dividends, overseas share market dividends, in listed property trusts, those kinds of investments. But the you think for retirees should you really be buying those kinds of risky investments. And that's part of the tension and that where I think things like ETFs can come in handy.

Just because the best way to manage those risks is to diversify. If you're going to rely on the company dividend to give you your income, you don't want to have it all in one or two companies and have a dividend cut and all off a sudden have financial problems. You want to buy as many companies as you can, you want to have well-diversified exposure to lots of different sources of income. But at the same time, you retire. You don't want to be managing a portfolio of maybe 50 or 60 companies on the Australian Stock Exchange, let alone a couple of 100 companies overseas.

This report appeared on 2021 Morningstar Australasia Pty Limited

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