Morningstar says retirees need balance
Friday, 29 January 2016 12:17pm

The latest research paper by Morningstar confirms balanced investment portfolios are most likely the best option for Australians when considering all the trade-offs around retirement income.

Looking at the probability of successful withdrawal rates, or the likelihood of not running out of money over a 30-year retirement period, Morningstar finds greater certainty comes with fewer equities in an investment portfolio.

"Once you are at the 70% [success] probability level, more equities produces higher withdrawal rates although most of this benefit is achieved at the 50% equity level [balanced option]," the Morningstar paper said.

It said a 50/50 portfolio of local equities and bonds captures the majority of benefits of adding equities and provides the highest withdrawal rate at a 90% probability of success between 20 and 40 years in retirement.

The paper - Safe Withdrawal Rates for Australian Retirees - also finds that continuing improvements in mortality rates and fees will likely drive safe withdrawal rates lower. But this means future retirees will need higher initial account balances to provide similar levels of desired income.

Morningstar managing director research strategy Asia-Pacific, Anthony Serhan, said current minimum withdrawal rates for account-based pensions in Australia may lead to investors depleting retirement assets too soon.

"When you look at the withdrawal rates we have in this paper and we compare them to minimum withdrawal rates or account based pensions, we would suggest there is a higher likelihood that people will run out of money before they die," Serhan said.

Morningstar Australasia chief executive Heather Brilliant said the firm was readying to ramp its retirement solutions research in Australia.

"As we start to see what is going on in Australia, we feel like our solutions around retirement can be very valuable," she told a briefing in Sydney yesterday.

"We have started the process of bringing some of those solutions here because we can see these challenges on the horizon.

"We see a real challenge around the high cost of advice. We know not a lot of Australians get advice because it's costly."

She added another challenge for an investor is there are limited annuity options in Australia, as opposed to somewhere such as the US.

Morningstar's Australian wealth forecasting engine - a back-end calculator that applies entire portfolio perspectives to help financial planners provide a broader picture - is expected to announce its first Australian client in the near future.

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