Regret risk is real - what is it?

Retirement is an emotional journey not just a financial decision

Many Australians arrive at retirement with significant capital but no ability to manage that capital effectively. They are constantly threading together a knot of worries – can they live the lifestyle they want, can they pass money onto their children – will they run out of money? Their reward for 40 years of saving is not less financial uncertainty. It’s more.

As a result, many retirees only draw down the minimums, they lack the confidence to spend, worry about running out of money and worry that their costs in retirement will go up at the end of retirement. Once they reach the later years of retirement they look back and feel a sense of regret from being overly frugal or conservative in their early years of retirement.

The crucial role of financial advisers in retirement

This regret risk is very real.

Financial advisers play a crucial role in not only helping to fund their clients' retirement but to ensure that their retirement is enjoyable and fulfilling. Financial advisers can help reduce the risk that their clients will pass away thinking…

Over the next decade it's likely financial advisers will become even more important in building client wealth while helping with decumulation of wealth and avoiding what we describe as 'regret risk'. The issues involved in optimising retirement income are complex and multilayered. Very few individuals will be able to manage that process by themselves.

Financial advisers are ideally placed to explain the investment processes, help clients spend their retirement savings, and manage family and estate planning issues, ensuring their clients' sense of obligation to their children doesn’t reduce their own living standards. Financial advisers are trained to understand the right combination of retirement income products to suit a retiree’s needs and lifestyle desires in retirement.

Every retiree is different - there’s no one approach. It’s about giving the clients the confidence to enjoy retirement. The financial adviser’s role is to help along the way, it’s not a set-and-forget relationship. A financial adviser is qualified to understand these unique needs of their clients and tailor solutions to best meet these needs.

Financial advisers don’t just play a crucial role for retirees but also help manage the next generation’s wealth to come.

Innovating the retirement income landscape

At Generation Life, we believe that to meet your retirement needs, it is important to understand that there isn’t a single solution but a mix of strategies combined.

The Australian superannuation system is acknowledged as world class and has delivered solid returns for most members. As more Australians move through the superannuation system, the retirement income landscape they move into is continuing to develop – with more innovation on the horizon.

Retirement income sources currently available:

• Age Pension

• Account-based pension

• Traditional fixed income lifetime annuities

• Equity release products (reverse mortgages)

• Investment-linked lifetime annuities

The missing link... Investment-linked lifetime annuities

Investment-linked lifetime annuities, which may have significant allocations to growth assets, can be a more effective way for retirees and their financial advisers to manage sequencing risk but also maximise the growth required in their income streams. Outside a lifetime annuity, protecting against this risk means:

• Forgoing higher long-term returns through a conservative asset allocation

• Bucketing strategy (using a cash bucket to fund income payments) and a growth bucket to grow capital

• Using expensive insurance strategies

An investment-linked lifetime annuity, can help to eliminate any concerns retirees may have with their account-based pension such as a market correction reducing their capital or that their overly conservative portfolio limits their ability to grow or maintain their income over time. With an investment-linked annuity, investors can remain fully invested in an appropriately risked portfolio.

An investment-linked lifetime annuity can also provide a regular income guaranteed for life, providing greater confidence to enjoy retirement, and building a greater legacy.

Key upsides of investment-linked lifetime annuities

• Broader diversification of investments

• Earnings are tax-free within the lifetime annuity

• There is no tax on money paid from a lifetime annuity purchased with superannuation money after age 60. In all other cases there may be tax concessions on your regular payments

• Investment-linked structure allows for higher income due to higher potential returns than a fixed income alternative

• An income is guaranteed for life

• Social security treatment may make the Age Pension more accessible

• If a spouse (reversionary) beneficiary is nominated, they receive the income on the death of the primary owner

• Where investment choice is offered, clients can react to different market conditions

When considering your retirement income needs, we recommend consulting a financial adviser to help you optimise your retirement portfolio and ensure you meet your wealth transfer objectives.

Introducing LifeIncome

A first of its kind Investment-linked lifetime annuity

Generation Life is proud to be shaping the retirement income landscape with LifeIncome, our investment linked lifetime annuity which ultimately helps to avoid regret risk in the later years or retirement. LifeIncome, our investment-linked lifetime annuity, delivers more income, more certainty, more flexibility and more choice to meet your clients' retirement goals. It is designed to optimise the level of income in retirement and complement other retirement solutions such as an account-based pension.

LifeIncome pays a regular income guaranteed for life that’s linked to the performance of your client’s chosen investment options, which can be switched at almost any time. LifeIncome also provides more income in the earlier years when your client is more active and healthier.

Furthermore, LifeIncome can assist with maximising Age Pension entitlements, including ancillary benefits, through social security asset and income test concessions.