Super policy shifts and the retirement roadmap

<p><strong>Glenn Freeman</strong>: Now, Robin, in talking about what you describe as a retirement roadmap, you are speaking about the policy changes in the context of Australia's aging demographic. What are the key points that you are covering there?</p> <p><strong>Robin Bowerman</strong>: Well, I think, obviously, the superannuation system is a great system on any sort of global measure. Could it be better? Yes. But the accumulation part of the system, we would argue, is very well thought through, it is mature, people understand the 9.5% default, et cetera. When it gets into the transition to retirement, to the spending, the decumulation part, we think there's still plenty of work to be done there on a policy level to &ndash; like, what are the right spending levels for people to adapt, are there retirement income products that we need to develop to actually help people look out not just 5, 10 years, but 20, 30 years. Because as we all know, demographics is destiny and the demographics says that we have an aging population. People are living longer, which is great news. But when you are retiring at 65, 66, you have probably still got 30 years and that's a big risk for people to how do you actually manage a portfolio for 30 years to make sure you don't run out of money at the end.</p> <p><strong>Freeman</strong>: So, what you are saying basically is, the system has been set up for the accumulation and people have been education about that whole saving for retirement, but that drawdown piece is still in its relative infancy, I guess?</p> <p><strong>Bowerman</strong>: Well, I think, it's a work in progress. I think the David Murray Financial System Inquiry recommended, CIPRs, Comprehensive Income Products for Retirement. The industry is grappling with that. The policymakers are grappling with what's the construct of that. Is it simply the allocated pension with some other stuff in it? So, I think, there's a fair bit of policy and regulatory settings, which from a retiree point of view, brings with a level of risk. Because as regulatory settings change, retirees, they don't have the ability to adapt or save more or to defer retirement if they are already in that retirement phase. So, I think, we need to be cognizant of the fact that changing rules when people have actually been saving for retirement through their working life and then changing rules when they are in retirement can have pretty significant effects.</p> <p><strong>Freeman</strong>: And just following on from that, so in the presentation today you had some quite interesting groupings that you've put together of the specific investment goals for people that are in retirement and also, some of the risks. You had, I think, four or five risks there, and you speak here about the policy and taxation risk. Is that what you see as one of the primary risks over the shorter term?</p> <p><strong>Bowerman</strong>: Over the short-term, I think, absolutely. Obviously, there's proposals in the market around, for example, abolishing franking credits. For self-managed superannuation funds, that would have a significant effect. And these are people, remember, who have been structuring their affairs, running the self-managed super fund based on the current rules. So, changing those rules, we think, would have pretty significant impact on portfolios because they are relying on those franking credits to give them ascertainable income.</p> <p>In terms of other risks, obviously, there's always market risk for defined contribution, for market-linked investments. The market risks are not going to go away. From a Vanguard perspective, we think, returns expectations should be lower than what they have been historically, so more in the, sort of, 6% to 8% range rather than 10s and double figures, et cetera. And then you have the other risks in retirement of a health event, something significant happens on that level. These are things that come along which are unexpected and can come with expensive health bills et cetera. So, people need to have enameling up holistic, sort of, roadmap around it, so that they can actually have some level of financial security and comfort about their retirement plan.</p> <p><strong>Freeman</strong>: You're talking about &ndash; it's an objectives-based process towards planning for the retirement. What are some of the ways that people can match their withdrawal strategy with their objectives in retirement?</p> <p><strong>Bowerman</strong>: Glenn, I think, one of the interesting points around this is, people sort of anchor around, well, how much do I need to retire. So, it tends to be a goal of what's the magic number. Is it $0.5 million, is it $2 million, or whatever that number might be. For us, it's more about is it multiple goals, it's actually about, yes, saving a certain amount of money, but it's actually about understanding your risks and balancing that. So, having that sort of strategy around it. And to your point, the key &ndash; we often have a good savings strategy. People are saving 9.5 per cent or perhaps into super, plus outside super investments. So, I've got a portfolio view. What's their spending strategy? When they are actually getting to retirement? What's the drawdown rate? Are they going to draw down at 5 per cent a year plus inflation? Are they going to draw 5 per cent of whatever the portfolio is that year? I mean, these are some of the, sort of, norms around the marketplace. We are advocating more of a dynamic spending rule; what people consider ceiling and a minimum. There's some volatility in the spending level, but at least it gives you a good probability that over 30 years, say, you're still going to have money in the bank.</p> <p><strong>Freeman</strong>: Sure. Great. Thank you very much for your time today, Robin.</p> <p><strong>Bowerman</strong>: My pleasure, Glenn.</p>