Financial Standard Comments - Industry overestimates amount needed for retirement

Comment by Allan Griffin (Griffin Partners & Assocaites)

Allan Griffin (Griffin Partners & Assocaites) — Thu, 06 Mar 2014 14:23:57 +1100

The article today about Morningstar report on retirement income is too general and vague for readers to accept or reject the apparent thrust of the report , i.e. the amount to save is lower than suggested by some industry participants.

Given the reported comment that adequacy depends on a number of factors, the reader is left uncertain about what these factors are and what Morningstar considers is a better basis to assess adequacy for Australians.

Maybe Morningstar should provide a link for us to read their report.

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Comment by John Haster (John Haster)

John Haster (John Haster) — Thu, 06 Mar 2014 14:27:59 +1100

What a pity that so much "research" is wasted by experts and analysts on retirement needs.
Why not survey retirees with a median level of income from retirement savings and a part or total Centrelink pension.
Do not bother to include anyone with more than $500,000 in retirement assets.
Then take into account a proper budget that includes every expense that is inescapable in todays Australia.
Forget about what takes place in the US. Deal only with Australian retirees and superannuation members.
Be prepared to find how difficult it is for most retirees to manage. Then encourage all to save as much as possible in their Super pre retirement. It will never be too much.

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Comment by Kristin King (Retired)

Kristin King (Retired) — Thu, 06 Mar 2014 15:13:00 +1100

I agree with Allan Griffin's comment, this article is too general. It fits into one of two main themes about the amount of money needed for retirement that I've come across. Both themes seem unrealistic. The first theme (where this article fits in) proposes that retirees need too much: eg, 70% or 80% of their pre-retirement income. The second theme, put forward by some superannuation organisations, proposes retirees need too little: eg, lump sum of $550,000 for single retirees. The first theme discounts that much of a person's pre-retirement income (especially in the immediate pre-retirement years and in the case of high income earners) is put towards savings and actual living expenses are considerably less than their total income. The second theme assumes that retirees will draw down all their superannuation before death and do not wish to leave anything to beneficiaries. My own view is that a single self-funded retiree who wishes to live on ~ $40,000 per year and who wishes to leave the bulk of their capital in tact needs ~ $900,000 in superannuation or other investments.

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Comment by Brent Hopping (Principal Edge Financial Services)

Brent Hopping (Principal Edge Financial Services) — Thu, 06 Mar 2014 16:02:11 +1100

Any assumptions based on a percentage of pre-retirement income could never hold up to any analysis. This whole debate is fundamentally flawed because it's too general.

The ASFA research is at least based on surveying real people in retirement. However these people have different atitudes to money than the generation starting work now. Many retirees have first hand experiences of World Wars & Great Depressions. They generally don't need to spend a lot of money to have a good life. However many baby boomers have different expectations that will require a lot more expenditure. Who know what a 20 something today will expect of their retirement.

Our experience suggests most people facing retirement now have insufficient funds accumulated to sustain a comfortable retirement. Everyone has a very personal attitude to money and a unique financial situation. Using a rule of thumb as a guide is unlikely to work for anyone.

One thing is for certain, we've never heard anyone complain about having too much money in retirement.

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Comment by Mark Smith (Financial Standard)

Mark Smith (Financial Standard) — Thu, 06 Mar 2014 16:17:56 +1100

Hi Allan,

Thanks for your feedback. I was rather limited by my word count but here is a link to the report in full with the relevant methodology

http://corporate.morningstar.com/ib/documents/MethodologyDocuments/ResearchPapers/Blanchett_True-Cost-of-Retirement.pdf.

Enjoy!

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Comment by David Williams (My Longevity Pty Limited)

David Williams (My Longevity Pty Limited) — Thu, 06 Mar 2014 18:23:04 +1100

Retirement income requirements reflect a range of variables on which the article does not elaborate. These include:

Longevity risk - how long is the planning timeframe and why is this chosen? (a source of great variability)
Health expectations
Retirement date risk
Composition of 'normal' expenditure and assumed inflation rates for those components
Capital and discretionary expenditures (eg travel) and timing
Accommodation risk - current and future requirements/expectations
Aged care risk - including the cost of the final stage, which will reflect a person's ACD etc.

All of these should be assessed in the context of each person's own expected time frame and then related to their financial situation. I would expect Morningstar to have covered some if not all of these but you wouldn't know without reading their full report which it appears is for USA anyway. AFSA at least have made more effort than most but the so-called 'industry response' is hardly a deeply-developed approach.

We really need a properly developed 'industry' white paper contributed to by well-informed entities and individuals in Australia to get a useful point of reference from which advisers can model individual differences.

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Comment by Phillip Gray (Morningstar)

Phillip Gray (Morningstar) — Fri, 07 Mar 2014 08:55:09 +1100

Mark's article summarises research undertaken by our Head of Retirement Research in the U.S., David Blanchett (see link to full study above). It's great that Mark's story has stimulated this discussion on this important issue! Andrew Lill from our Ibbotson Associates Australia business would be keen to hear your views - drop him a line at andrew.lill@ibbotson.com.

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Comment by Tony raditsis (In Touch Financial SOlutions)

Tony raditsis (In Touch Financial SOlutions) — Fri, 07 Mar 2014 10:19:50 +1100

the basic flaw of most projections as i see it is the one that takes the income required at retirement and simply indexes it. From what i observe, most people go thru at least 3 phases in retirement; active, passive and care. You only have to look at clients in their mid to late 80's, there is no way they spend at the rate of a 65 yo. On this simple observation, most estimates are too high.

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Comment by Darryl Gobbett (Prescott Securities)

Darryl Gobbett (Prescott Securities) — Sat, 08 Mar 2014 14:47:05 +1100

Might be a shock to most advisers if they actually disussed with their real retiree clients what the latter wanted through time and help them understand what constraints/opportunities/risks might be attached. This is rather than look for a managed fund off the shelf based on some asset allocation consultant's latest modelling.

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