Financial planning and retirement - the need for a new approach

Financial planners need to develop new business models that take into account the two phases of retirement – active and elderly, according to Phil Galagher.

Most existing financial modelling for pre-retiree clients is designed to let them know how much in retirement savings they need for a comfortable retirement. 

Planners now need to think in terms of the entirely different needs of two phases of retirement – the early, or active retiree, and the less active elderly retiree – and how this affects their clients, as well as their own business.

It means that planners need to look at their business models and develop ways of accessing the skills and products required to service elderly retirees.

The first stage of retirement is characterised by being active, independent, seeking experiences and pursuing dreams that can be dependent on the level of income.

This is increasingly followed by an expanding second stage, characterised by frailty and less activity which – depending on the level of support needed – doesn’t require as much income.

So looking at financial models which say “you need an indexed $x income per year throughout your retirement” is misleading.

Present financial models tend to look at an initial amount needed to fund a ‘comfortable’ retirement, which is based on travel and entertainment, and simply increase initial income by an inflation factor to meet future needs.

Such modelling doesn’t take into account that there will come a time when retirees lead a less active life and their income needs will be reduced.

At the same time, regulations require pension payouts from superannuation to increase as a percentage of capital at set ages.

So a well-managed super fund in pension mode could end up paying a larger pension in real terms to a member at age 80 than it did at age 65.

Yet when retirees consider a retirement village or aged care, a lump sum will be needed.

Therefore, when retirees slow down, they may well need advice on the best way to reinvest the income they once spent on external leisure activities, in the expectation of a probable need for an increased level of care later.

This will enable them to be better prepared for the probability of intensive medical support needed during the last months of their life.

The number of elderly retirees is only going to increase further as Australians live longer and as baby boomers grow older. They will seek different types of service to those they found useful when they were active retirees.

While there is not a set age when an active retiree becomes an elderly retiree, and the slowing down was likely to happen gradually over a few years, it is likely that most retirees will have around 15 years of truly active retirement.

Slowing down is inevitable, however, and the time spent as an elderly retiree is likely to be almost as long as the time spent as an active retiree, for those who are now pre or early retirees.

The number of Australians aged over 85 has doubled as a percentage of the total population in the past 20 years, and at the same time increased in numbers by over 170 per cent. Their needs are clearly quite different to those of a 65 year old.

Overall, the needs of active retirees are well served, but those of elderly retirees are not so well served, and as numbers continue to grow, more strain is being placed on the resources that are available to help them.

This can involve complicated and technical advice, such as managing intergenerational wealth transfer and acting under power of attorney, to the mundane. 

People with families can usually rely on them for help, but not everyone in Australia has family nearby for all sorts of reasons.

At the same time, many older Australians don’t want to be a burden on their children or grandchildren and want an entity they can trust to look after their interests.

This means providing financial planning services to elderly retirees is likely to see significant growth in the immediate future in all areas.

Some financial planning businesses already recognise this.

While the increased need for medical care and aged accommodation has been well documented, there will be a corresponding increased demand in trusted suppliers of financial services and hands-on assistance to manage the affairs of people, either no longer able to be, or not interested in being, involved themselves.

One approach for financial planning firms is the development of strategic alliances for organisations already experienced in providing the services required by the elderly – such as trustee companies.

Indeed, trustee companies are among very few entities that have the experience and record of service, products and knowledge (including wealth management) to deliver the across the board help that less active and frail, self funded elderly retirees need.

Phil Galagher is head of wealth management for Equity Trustees Limited.