There is a conflict between risk tolerance-based approach to retirement strategy and a goals-based approach as retirees continue to be risk averse, according to a panel.
Speaking at the Post Retirement Australia conference, Jeremy Duffied, SuperEd and Retirement Essentials chair, said this was a problem that had to be solved.
“We have to find a way to integrate risk aversion into goals-based financial planning and that’s one of the challenges ahead of us,” Duffield said.
“Putting it into simple terms, so that people can understand the outcome and get the outcomes they need. There are important things we have to educate them on, for instance, the wonderful conditionality in the Age Pension.
“The fact Age Pension is an automatic stabiliser and if you lose money on your assets, as you did in COVID-19 in the period of March 2020, you pick it up on the Age Pension income. It’s an interesting environment to think about what risk really means.”
Duffield said it was an unfortunate truth that risk aversion was “alive and well” in the older population.
“It’s quite incredible really, we find that 30% of our clients at Retirement Essential have taken all their money and put it in cash,” Duffield said.
“That’s the greatest evidence that people are risk averse, but there plenty of studies around showing the same thing.
“Mercer’s 2018 study looked at people’s willingness to tolerate investment risk and found that less than 20% of retirees were willing to take a 10% loss in any one year and less than 10% were willing to take a 15% loss.
“That shows investment risk aversion is very vibrant, but it also conflicts with their other goals where the top goals are wanting to have enough money to live on for the rest of the life.
“To achieve those goals you can’t sit on cash at 100% in a period when you get less than inflation on your interest rate.”
Mark Spring, Active Super head of strategic implementation, said the industry had been made to be unnecessarily complex.
“We think our members know more about we do than they do,” Spring said.
“We haven’t dumbed it down to say this is basically why we exist, this is what we do, this is what we offer.
“When we start with this simple stuff we can educate them more about how that fits with other things and they will be empowered – super funds have an obligation to do this.”
David Knox, Mercer senior actuary, said the Retirement Income Review discussed better quality and more accessible advice and guidance.
“They talked about the need for more guidance and assistance to retirees but how do you do that in our financial advice system?” Knox said.
“Now we know there’s a review of financial advice next year and we might see more discussion on that but some discussion around that would have been helpful.”
Knox said it was important to make sure people were spending in retirement to prevent further wealth inequality into the next generation.
“The other important thing in terms of fairness and something we don’t often discuss is if we encourage people to spend more money in retirement then they’ll be less money for inheritance and bequeaths and that will reduce inequality,” Knox said.
“If we leave all our money to our children then certain members of the next generation are favours while others are not.”
