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The powerful trends shaping your retirement


October 2016

Investment markets, public policy and healthcare innovation are changing expectations for our later years.





Jason Murphy outlines the fiscal, economic and social patterns determining our post-work life.

Entering retirement should be exciting: a world of new opportunities. It’s a time when you determine how you will transition from your business or career, what investment plan will be best for the future, what you will pass on to the next generation and what shape the rest of your life will take.

But the world is becoming more complex, and in a globalised world fast-evolving trends play a powerful role in people’s retirement experience. Fractures in the global economy, demographic shifts and changing superannuation rules are making planning more complex.

A long-term outlook requires an understanding of major trends. Whether planning for retirement or already in retirement, Australians need to pay active attention to the what is shaping their future.

Era of low returns

The interconnectedness of financial markets, politics and economies today means one event can often have a cascading effect. We need to be more careful than ever in monitoring and managing our investments. Yields on most bonds, cash and property have plunged around the world as the global economy wonders where growth is going to come from next.

Term-deposit rates for an investment of $10,000 in Australia averaged just 2.15 per cent in August 2016, the lowest in the history of records kept by the Reserve Bank. In Europe, investors have put money into 50-year Swiss bonds at negative interest rates. Bond yields are also currently negative in Japan and Germany.

“The prospect of an extended period of low returns is frightening for anyone who has modelled their long-term investments with old assumptions about rates of return. But an investment strategy has to take into account changes in buying power over time,” says superannuation veteran Rodney Maddock, a professor at Monash and Victoria universities.

“People tend not to think in inflation-adjusted terms. In real terms I don’t think returns are going to fall far at all. They are down at the moment but not nearly as far as in nominal terms,” says Professor Maddock.

Australian investors can take some solace from the consumer price index, a measure of inflation. It has sunk to record lows in recent years, including a fall of 0.2 per cent in the March quarter of 2016. Lower inflation means whatever return you are getting looks even better once you adjust it for inflation.

Diversify and be strategic

“The real solution to lower returns requires more than hoping for weak inflation,” Professor Maddock says, “it means you have to deploy the right investment strategy for you.”

“People have been caught out using ‘naïve allocation’,” he adds.

“What is interesting is how important diversification has been. I don’t think people – especially self-managed super people – have understood that. Most self-managed super funds at the moment are massively overweight in Australian equities and cash.”

Maddock describes what he calls “horror stories” of investors who have had 100 per cent cash allocations in recent years. “Diversifying investments across asset classes and economies throughout the long period of time it takes to grow retirement savings is the best strategy against low returns,” he says.

Maddock offers the example of China and India, which have shown that emerging markets have the possibility of growing far faster than developed markets.

“Talking about diversifying is easy. Doing it is harder and a big impediment is fear,” says ANZ senior private wealth adviser Ross Falconer. He believes over-abundant information – like the thousands of calamitous stories about Brexit – can cause decision paralysis.

“Getting access to research is good but right now people are getting so bombarded by information that it is actually hindering their decision-making. We see clients that are just sitting on cash. Every day they read all the articles and they just sit there because they don’t know what to do. It makes it even more difficult [for them] to plan for their future.”

The message is clear – analysis is important but it has to act as a complement to action, not a substitute. Make a clear long-term investment strategy, implement and monitor.

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Investing for a long life

Good investment strategy becomes only more relevant given recent trends in longevity. You might well live to be over 100. The number of Australians reaching three-figure ages has exploded – over the past two decades, the number of centenarians increased by 254 per cent, reflecting an increase in life expectancy for both males and females during the period.

The obvious implication is the need for an adequate superannuation balance that lasts as long as you do, catering to inflation and the rising cost of living. But longevity also changes the ‘how’ of retirement management.

“What is important,” says Rice Warner consultant Nathan Bonarius, “is that the challenge of investing wisely does not stop the day you retire.”

“It is important to ensure people continue to invest in assets which are going to provide that higher yield and that growth element,” he says.

“You [may] have a long period, 20-years-plus from the day of retirement and if you put it in a low-yield term deposit – even though it will be relatively safe from volatility – you are more likely to run out of money.”

Life expectancy for someone aged 65 is estimated to be another 20 years, but with rapid improvements in medicine, it could become far longer. Retirees can expect to spend much of that time in good health, but they should not assume that means they won’t be at the doctor. Improved preventative medical technology tends to mean increased spending to keep us healthy.

That should be good news, but it isn’t always.

“The ones that are in bad health worry about their health, the ones in good health worry about their money,” says ANZ’s Falconer.

One way to reduce money worries is by choosing a retirement investment product that deals with what is known as ‘longevity risk’. New products are filtering onto the market to help retirees manage the risk of their superannuation running out. The best-known category is annuities. For a price, retirees can get a regular payment for as long as they live.

Annuities vary widely and the diversity of products is only increasing as lifespans beyond retirement increase. The government has recently recommended super funds offer a comprehensive income product for retirement that has some of the features of an annuity. Keeping an eye on new product offerings could mean finding an option that meets your unique needs.

A downside of a long life is that falling short of your retirement savings goal due to retiring early is a bigger problem. Whether through ill health, retrenchment or the need to wind up a business, people can often find themselves ‘retired’ before they planned.

In such a case, having carefully managed retirement savings over the course of a working life is even more important. Such people need a ‘bridge strategy’ to take them into retirement, rethinking how they can make the most of their assets, whether they can draw upon insurance, and reviewing their expectations in retirement. And it makes understanding policy and regulation around these savings crucial.

Get on top of policy

For a successful retirement you must consider more than just your own longevity. The ageing of society is also important as an aging Australia forces change in government policy.

The high and rising cost of the aged pension to the nation is fundamental to superannuation policy – indeed it is the key reason employer contributions to superannuation became compulsory.

The federal government’s 2015 Intergenerational Report: Australia in 2055 predicted pension spending to rise from 2.9 per cent of Australia’s gross domestic product to 3.6 per cent in the next 40 years. That trend could encourage governments to make changes that entice people to work longer. One such example is already in progress – eligibility for the pension has risen to age 65 and will rise to age 70 by 2035.

That could herald changes in superannuation. The preservation age – the age at which you can access superannuation – has already risen from 55 to 60. The Institute of Actuaries of Australia recommends lifting the preservation age to at least 65.

Superannuation was arguably the central issue in the 2016 federal election. But it is not the only area that could change. Changes to capital gains tax and negative gearing – proposed by Labor – could also change the landscape of retirement.

As the dust settles, superannuation changes that look set to be implemented include a cap on balances transferred to retirement phase ($1.6 million), and lowering the cap on non- concessional contributions to $100,000 a year, among others. Capital gains tax and negative-gearing rules are untouched for now. But much will depend on what the Senate has a taste for.

University of Western Australia finance professor Paul Gerrans says people preparing for retirement must pay attention to policy changes.

“If you are at one end of the distribution, so if you a very high income and very high amount of savings already, then you might be subject to some reduction in the opportunities that you have.

“Whatever you do, do it early. You are trying to make your plan as robust as possible. Everything that seems to be happening seems to be curtailing some of those opportunities. So take the opportunity that you have now,” he concludes.

Those that best adapt their investment plan to the trends shaping the world will be those that enjoy the best-funded retirements.


To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.

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