Many retirees can afford a comfortable retirement – yet hesitate to spend, delay decisions or default to caution.

New research from Allianz Retire+ has identified decision inertia, driven by a powerful fear of commitments perceived as irreversible, as an emerging risk to retirement outcomes for otherwise well-prepared Australians.

Many retirees can afford a comfortable retirement – yet hesitate to spend, delay decisions or default to caution, according to a new white paper released by Allianz Retire+.

The behavioural cost of this inaction is clear across the Australian retirement system. Around 700,000 retirees leave their superannuation in accumulation after retiring, costing individuals up to $136,000, while around half of account-based pension holders withdraw only the minimum required, leading many to live more cautiously than their savings actually demand.

While many financial risks can be managed through diversification and portfolio construction, longevity risk remains fundamentally different. It cannot be diversified away within an individual retirement portfolio.

When retirees lack protection against the risk of outliving their savings, advisers are forced to manage longevity as a probability rather than a certainty, a reality that often drives underspending, heightened caution and lower confidence in retirement.

David Kane, Chief Executive Officer, Allianz Retire+, said advisers face a unique challenge when it comes to longevity risk.

“Longevity is the one major retirement risk advisers can’t meaningfully diversify away. While markets can be modelled and managed over time, traditional asset allocation strategies can’t insure against the risk of outliving your savings.

“Guaranteed lifetime income is not a product preference, it is a structural planning tool that helps advisers discharge their duty of care by securing essential income for life, and in doing so, gives clients the confidence to enjoy the years they can without fearing the years they can’t.”

The paper ‘The two-chapter retirement’ brings together a wide body of evidence spanning behavioural research, Australian and global retirement studies, economic data and adviser practice insights to explain this persistent disconnect. The paper synthesises this evidence into a single, coherent framework that reflects, generally, how retirees may actually think, feel and make decisions.

The ‘Two-Chapter Retirement’ framework highlights how many people experience their retirement journey as two psychologically distinct phases:

• an active, aspirational early chapter they can clearly imagine; and
• a later, more uncertain chapter associated with caution, fear and complexity.

Mr Kane added: “What we see is not the result of financial illiteracy or inadequate savings. These are clients who are well resourced and understand their position and yet are still reluctant to act.

“The constraint is behavioural, and no amount of additional information or projections are likely to help. Instead, advisers need a fresh approach which reframes levels of commitment and stresses the exit ramps in any retirement income strategy.

“The retirement system is getting more complicated, and many people aren’t aware of products that can give them guaranteed income. Combined with natural hesitation about large financial decisions, this is leaving many retirees unclear on their spending capacity and holding them back from plans that could help them enjoy the retirement they’ve worked hard for.”

These same patterns have played out consistently across decades of experience for Allianz in the United States at greater scale. In a 2024 survey by the Allianz Centre for the Future of Retirement, 85% of respondents said they find it easier to spend when they know their basic needs are covered, with 68% saying that the fear of unexpected expenses prevents them from wanting to spend money.

The white paper outlines the benefits of guaranteed income solutions, and the positive impacts for retirees when their advisers include these products as an option in their planning discussions.

“New-era retirement income solutions offer flexible access to capital and growth with downside protection not seen in older-style annuities.” Mr Kane said.

“Advisers who can help their clients distinguish between what is genuinely irreversible and what merely feels that way will materially shift their clients’ willingness to act, and will ultimately improve both their clients’ financial and emotional security.”

The ‘Two-Chapter Retirement’ framework represents a new paradigm for retirement planning. Recognising this two-chapter mindset is essential because it shapes how clients respond to advice, perceive risk and evaluate strategies from the outset. Viewing retirement planning through this lens allows advisers to better support their clients as they balance the desire to live well today with the need to secure tomorrow.

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Ada significantly reduces the adviser and paraplanner learning curve and product analysis process.

Allianz Retire+ launched a market leading Al powered assistant to transform how advisers engage with its retirement income solution, Allianz Guaranteed Income for Life (AGILE), empowering them to deliver better retirements for their clients.

What advisers have told us is that retirement solutions can sometimes be complex and time consuming to understand and compare. To bridge the gap in product awareness and make technical details more accessible, we have partnered with V2 Al, a leading data and Al consultancy, to create a market first in building an Al tool for financial advisers, paraplanners and the financial services community.

The Adviser Digital Assistant, or Ada, is an interactive, conversational Al tool designed to help understand AGILE in a simple, engaging, and intuitive way. Moving away from time consuming and dense documentation by creating a space where advisers can build knowledge on their own terms was our goal. Ada significantly reduces the adviser and paraplanner learning curve and product analysis process, delivering contextual education precisely when and where it’s needed, shifting adviser enablement from static learning to dynamic, embedded support.

Importantly, Ada is built on enterprise-grade tooling with robust guardrails to ensure the highest standards of quality and accuracy.

David Kane, Chief Executive Officer, Allianz Retire+, said: “Ada adds another market leading differentiator to our AGILE product.

“We’ve listened to advisers and recognised that for them to effectively solve for their clients’ retirement needs, they first need a frictionless way to master the tools at their disposal. Ada will allow advisers to ask questions and receive robust answers within seconds, freeing up their time to focus on building better retirements for their clients.”

“We appreciate the important compliance obligations associated with providing financial advice and have developed Ada with these in mind. Leveraging Amazon Bedrock, Ada is built on enterprise-grade tooling with robust guardrails to maximise accuracy and quality.”

Craig Howe, Chief Executive Officer, V2 Al, said: “Through our partnership, we have developed an enterprise-grade intelligent, Al-led solution that revolutionises how Financial Advisers engage with Allianz Retire+. Built as an AWS-native Al capability, Ada leverages the power of Anthropic Claude via AWS Bedrock, ensuring robust data security, seamless functionality, a user-centric experience,
and full control over its roadmap.”

The retirement income market is becoming increasingly relevant for Australians, however the complexity of traditional documentation and supporting materials can create uncertainty. Ada addresses a critical gap in the market by offering a dynamic experience to make complex retirement income concepts more accessible for advisers and their clients.

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Advisers need to be able to help their clients understand and navigate the six stages of retirement.

Retirement marks a truly significant transition in one’s life, representing the culmination of years of hard work, diligent saving, and careful financial planning. This period is far more than just the end of a career; it is a profound pivot point.

While retirement is often eloquently described as a journey, it is critical to recognise that this journey does not simply conclude with the cessation of formal employment. Instead, it evolves dynamically into a complex new phase of life that demands careful navigation to ensure a client’s continued wellbeing, fulfillment and importantly, financial security.

Beyond merely focusing on traditional investment and financial management, comprehensive retirement planning must encompass a broader spectrum of emotional, social and psychological considerations for each client. In this expanded context, the role of a trusted financial adviser naturally transcends traditional investment strategies and extends deeply into providing holistic support for the client’s overall life wellbeing.

As individuals initially enter retirement, they frequently find themselves grappling with a myriad of uncertainties and necessary adjustments. Pressing questions about future lifestyle changes, evolving health needs, maintaining social engagements, and, critically, their sustainable spending capacity, all demand immediate and focused attention.

In this unfamiliar and often challenging landscape, skilled financial advisers instinctively become trusted and indispensable guides. Their support spans from fostering a comprehensive understanding of all available financial resources through to providing crucial emotional support during these major life transitions. Advisers, therefore, play a pivotal role to empower retiree clients to lead genuinely fulfilling and self-directed lives.

Despite how it is often portrayed, retirement is anything but a single, monolithic event. Those who are actively living through it – as well as their financial advisers – know this reality. It has been established through research dating back to the 1980s^[1], and since ratified by more recent, thorough studies, that retirement comprises distinct and identifiable stages. Each one of these stages possesses its own unique characteristics, presents its own specific set of challenges, and requires a tailored advisory approach. Furthermore, the exact amount of time a client spends within any given stage is highly unique to them, varying significantly depending on a wide range of individual personal and financial factors.

The comprehensive cycle begins with the preparatory stage, known as pre-retirement, which leads into the second stage: the actual retirement event itself, whether that occurs as a carefully planned or an unexpected transition. This momentous shift is then traditionally followed by the initial honeymoon period of retirement, which can then give way to a period of disenchantment as the new reality sets in. This is then followed by a necessary reorientation period. Finally, the retiree reaches the settling stage, establishing a new sustainable routine and pace of life that will continue to evolve and adapt throughout the rest of their retirement years.

Stage one: Pre-retirement

The first phase in the retirement process, as identified by scholars such as Robert Atchley^[1], is the pre-retirement stage. This is far more than simply being the final years of employment; it is a vital, intentional period of transition where individuals begin the essential, gradual process of mentally and practically disengaging from their professional lives.

During this time, clients actively start to envision and map out their post-employment existence, moving beyond vague aspirations to taking concrete steps toward comprehensive financial, emotional and logistical readiness. A key component of this preparation often involves exploring formal strategies, such as a ‘transition to retirement’ strategy, designed to ease the shift from full-time work to a new life structure.

It’s also a time when clients may feel the first flutter of fear about their retirement funding. FORO – the fear of running out – is real. Years of inflation coupled with more recent market volatility have reinforced the notion that while people may live longer, there’s no guarantee their retirement savings will stretch that far.

Therefore, at this pre-retirement stage, your role as a trusted financial adviser is paramount. An adviser’s mandate is to guide their clients through a complex myriad of decisions, all aimed at laying the robust groundwork for a secure, comfortable and fulfilling future. This advisory work begins with a thorough and comprehensive assessment of the client’s current financial standing against their anticipated future retirement needs. This assessment must consider the specific income stream required to meet the client’s lifestyle objectives throughout what may be an extended retirement period.

A core component of your value here is to provide clients with an unambiguous and clear understanding of their financial position. By quantifying their current standing and projecting future requirements, you can empower your clients to make fully informed decisions and take proactive steps to bridge any identified gaps between their existing assets and their desired retirement lifestyle.

With increased longevity now meaning retirement may span twenty-five years or more, careful planning is crucial. To provide clients with a strong certainty of income across this extended duration, it is essential to lock down decisions about sustainable income generation during the pre-retirement stage, which includes a detailed consideration of the most suitable retirement income products.

For many clients, the focus shifts to ensuring reliability. Products that offer the certainty of a guaranteed lifetime income, ideally coupled with reasonable access to capital and some form of capital protection, can provide substantial peace of mind as they approach the official end of their working careers. You must expertly weigh the client’s risk tolerance, longevity projections, and income needs to select and implement solutions that maximise financial security while minimising worry. This income planning is the bedrock upon which the entire retirement structure is built, making this stage the most financially intense part of the advisory relationship.

However, the guidance offered in the pre-retirement stage extends far beyond pure financial planning. You can also assist clients to create a structured retirement master plan that intentionally encompasses not only quantifiable financial goals but also personal aspirations and desired lifestyle preferences.

This holistic planning might involve reviewing optimal healthcare and insurance options, as well as collaboratively devising plans for future leisure activities, extensive travel, or meaningful volunteer work. By delivering a tailored retirement plan that aligns precisely with each client’s unique needs and aspirations, you help foster a crucial sense of purpose and fulfillment in the pre-retirement phase, thereby ensuring a smooth, confident transition into retirement and laying the strongest foundations for a secure and satisfying future.

Stage two: The ‘Near’ phase

The Near Phase is the stage immediately surrounding the actual cessation of employment, often referred to as the ‘retirement event’. Ideally, this event is the culmination of years of planning and anticipation, signifying a significant and welcome life transition characterised by freedom and leisure. However, in less ideal scenarios, clients may be forced into retirement due to unforeseen and unplanned events.

Planned retirement

For clients with a structured transition plan, this phase involves finalising financial arrangements. This typically includes setting up income streams from superannuation funds and retirement income products to ensure the client’s desired lifestyle is maintained. Your guidance is essential here for factoring in critical risks such as inflation, market volatility, as well as longevity and sequencing risk.

Unplanned retirement

Unforeseen events can significantly impact a client’s readiness. Of the 156,000 Australians who retired in 2024-2025, 13 percent left work earlier than planned due to sickness, injury or disability and six percent found themselves retrenched or dismissed and unable to find alternative employment^[2].

Your role is critical when it comes to helping clients navigate these unexpected challenges. This involves providing guidance on contingency planning and evaluating appropriate insurance coverage. Clients benefit greatly from the early implementation of flexible retirement income strategies, which better position them for an unplanned exit from the workforce.

The retirement event brings a host of complex financial, emotional and logistical considerations. Beyond the technical financial strategies, you may find yourself providing emotional support and reassurance during times of uncertainty, helping clients adapt to their changing circumstances while staying focused on their long-term financial goals.

Stage three: The honeymoon period

The honeymoon period immediately follows the retirement event, marking a period of newfound freedom and intense relaxation where clients actively savour the fruits of their labour by engaging in desired activities. This period is often characterised by travel, hobbies and anything that brings your client enjoyment.

The duration of this phase is highly individual, potentially lasting anywhere from six months to several years, as each client’s unique experience and enthusiasm determine its length. Despite the initial euphoria and high activity level, this time requires clients to maintain a critical sense of financial stewardship to ensure their new, active lifestyle is financially sustainable over the long term.

Your strategic guidance is indispensable here; you can help clients enjoy this stage without inadvertently depleting their assets through overspending. A key action is to establish a sustainable spending plan that aligns their desires (discretionary spending on travel and entertainment) with their reliable retirement income, while firmly securing essential needs like housing and healthcare.

This period is also crucial for optimising investment portfolios to manage risk and returns, as significant market drawdowns early in retirement can severely jeopardise long-term financial outcomes. By providing this guidance, you enable clients to maximise their enjoyment and freedom while they are young and in good health, without compromising their future financial security.

Stage four: Disenchantment

Fortunately, this phase does not affect all retirees, but for those it does, it typically follows the initial excitement of the honeymoon period. This stage is marked by a letdown when the reality of retirement fails to meet earlier, often idealistic, expectations. Common symptoms include feelings of boredom, isolation, anxiety and disillusionment. These feelings are often provoked or exacerbated by financial concerns or the loss of the structure and social identity provided by work.

In this challenging period, your role often extends beyond financial oversight to become a holistic guide helping the client reconnect with purpose and stability. If a client does become disenchanted, a fundamental step is to initiate a comprehensive reassessment of the client’s current situation and their initial retirement goals.

At the same time, you can conduct an open and non-judgmental conversation to gain insights into the client’s sources of dissatisfaction. What is and isn’t working? Does the disenchantment stem from financial anxiety or non-financial factors?

This provides you with an opportunity to help your client readjust their priorities and expectations. This might involve revisiting the financial plan, adjusting the spending plan to alleviate monetary pressure or confirming that the current plan is robust, thereby assuaging anxieties. The goal is to move your client from generalised dissatisfaction to actionable steps.

Where disenchantment stems from a loss of purpose, you can facilitate solutions by exploring avenues for personal fulfillment and engagement that lie outside the financial portfolio. You could discuss potential structured activities such as a return to part-time work or consulting or pursuing volunteering opportunities that align with their personal values. Both options can help provide your client with a sense of meaning and contribution.

By encouraging clients to cultivate and maintain a strong sense of purpose and structure in their daily lives, you provide essential support that supports your client to transition out of disenchantment and move towards the next, more stable stage of reorientation.

Stage five: Reorientation

This phase follows the potential emotional dip of disenchantment. It is a period where clients, having recognised that their initial retirement assumptions or expectations were perhaps a little flawed, begin to construct a new, more realistic and satisfying lifestyle. This involves questioning their post-retirement aspirations and making deliberate lifestyle choices that align with their needs and long-term financial reality. While proactive engagement in comprehensive retirement planning well in advance of the retirement event can significantly mitigate uncertainty and facilitate a smoother transition into this phase, you can also play an important role in guiding this recalibration.

The core task during reorientation is helping your client cultivate a new sense of purpose and direction in their post-work life. You can do this by engaging clients in a deep exploration of their interests; the activities, relationships or causes that provide genuine meaning and fulfillment. Although this ideal exploration begins years before retirement, it must be revisited and adjusted throughout the retirement lifecycle to ensure the client’s current lifestyle remains aligned with their evolving personal and financial objectives.

By skilfully integrating financial projections to ensure sufficiency and sustainability with lifestyle preferences, you can assist clients to make informed, deliberate decisions that actively support their long-term personal and financial wellbeing and sense of fulfillment.

Stage six: Stability

Sometimes referred to as the ‘Routine Phase’, stability is the stage where retired clients finally settle into a predictable rhythm of life that reflects their preferences, interests and core values. For some, this routine is established soon after leaving full-time employment; for others, it may only solidify after navigating the other earlier stages of retirement.

This stage is typically the longest, often lasting many years, and provides your clients with the enduring opportunity to fully embrace the lifestyle they have worked to envision and create. Even during this settled period, your role retains importance. As clients become comfortable in their routines, their financial needs and priorities continue to evolve, even if only incrementally. Importantly, this stage often sees the emergence of health issues, which can necessitate a reassessment of living arrangements (such as downsizing or moving to aged care) and a significant adjustment to required medical expenses.

A thorough review of retirement goals, income sources and spending patterns is fundamental to ensure that each client’s financial strategies remain aligned with their long-term objectives. Regular check-ins allow you and your client to make necessary adaptive adjustments as new opportunities or challenges arise.

Whether your client decides to pursue a new, costly pastime, undertakes an extended travel plan, or is suddenly faced with unexpected medical expenses, you can offer the essential guidance and support to adapt the retirement plan accordingly, therefore preserving both the client’s financial security and their peace of mind within their established routine.

Ultimately, the stages of retirement confirm that retirement is a complex, multi-faceted journey, not a singular financial event. For the modern retiree, the financial adviser is far more than a manager of assets; you are a continuous partner in life planning. Your role will dynamically shift across the stages: from the crucial tactical setup of income streams and risk mitigation during the near and honeymoon phases, to acting as a vital sounding board during the potential psychological struggle of disenchantment.

You provide the necessary structure for successful reorientation, helping your clients to define new purpose and recalibrate their expectations. By ensuring that financial stability consistently supports evolving lifestyle choices and personal fulfillment throughout, you can provide your clients with the structure and objective guidance necessary to not just fund their retirement but live it with confidence and meaning.

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Notes:
[1] Robert C. Atchley, Retirement as a Social Institution, Annual Review of Sociology, Vol. 8 (1982)
[2] ABS, Retirement and Retirement Intentions, Australia, 2024-25 financial year, October 2025

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at December 2025 unless otherwise specified and is for general information purposes only. It is not comprehensive or intended to give financial product advice. Any advice provided in this material does not take into account your objectives, financial situation or needs. Before acting on anything contained in this material, you should speak to your financial adviser and consider the appropriateness of the information received, having regard to your objectives, financial situation, and needs. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material.

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Get better prepared for conversations with your Gen-X clients about the decumulation phase of retirement.

This year, the first of Gen X will turn 60. Over the coming decade, waves of Gen X Australians will join the baby boomers in enjoying a longer, healthier retirement than their parents and grandparents. Funding those years continues to be a source of concern for many as they approach this new phase of life.

Just in the last month, ASIC has once again criticised superannuation trustees for failing to effectively communicate with members about retirement. The regulator warned that many funds rely on generic, pre-retirement messaging and miss opportunities to provide meaningful support once members retire.

In its review, Report 818 – From superficial to super engaged, ASIC found a widespread lack of urgency in improving retirement communications, leaving many Australians without the information they need to make confident, informed decisions. With 1.5 million people already in retirement holding around $575 billion in super assets – and another 2.5 million expected to retire in the next decade – ASIC has urged trustees to prioritise more targeted, timely and member-focused communication strategies^[1].

When clients retire and their regular employment income ends, in an ideal world they should not have to worry about inflation, market volatility, or how long their savings will last. Nor should they face the fear of outliving their money and having to be reliant solely on the Age Pension to get by.

While super funds may provide foundational communication regarding retirement savings, the complexity and personalisation required during the decumulation phase demand a more tailored approach. You’re positioned to know your client and understand their short, medium and longer-term financial and personal retirement objectives. Given that at 30 June 2025, approximately 25 percent of Australia’s $4.3 trillion superannuation pool were  held in self managed superannuation funds (SMSFs)^[2]., it’s likely that a proportion of your clients are trustees of their own fund and will need even more comprehensive guidance when members reach the pension phase.

‘New era’ retirement income products

The OECD’s biennial report on the pension systems across OECD and G20 countries tells us that Australia has the world’s fourth largest retirement system^[3].. The Reserve Bank of Australia notes that our superannuation system sits at about 150 % of GDP and that projections have put the ratio as high as 244 % of GDP by 2061^[4].

Despite the increasing size of super retirement balances, research consistently shows that money worries are a leading cause of anxiety for older Australians^[5].. The biggest fear expressed by retirees is running out of money; either because they outlive their savings or because it’s eroded by external factors such as market volatility or inflation, both of which have been painfully evident for several years.

When soon-to-be retirees are faced with traditional retirement income products, there are generally tough trade-offs to be made between income certainty and flexibility. Many of those traditional retirement products, based on life expectancy, left nothing for the estate for those who died earlier than expected, or for those who enjoyed longer lives, no income support.

New era retirement income products have addressed these issues. Research has consistently shown that FORO (the fear of running out) is a major concern, but longstanding concerns around complexity, cost, flexibility and growth potential of traditional retirement income products has led Australians to eschew the sector in droves. Failure to utilise retirement income product may result in retirees ‘self-insuring’, living a frugal life to ensure they don’t burn through their retirement savings.

There is a better way, and it is important that advisers (and yes, superannuation funds) highlight both the progress retirement income products have made and the important role they can play in a well-rounded retirement plan. It also highlights the need for clear information and education to help your clients understand and make the most of these products.

New era retirement income solutions – such as guaranteed lifetime income solutions – can provide your clients with greater confidence about their future. Lifetime income streams function as a form of insurance against the financial risks of outliving savings.

By allocating a portion of a client’s portfolio to a new era retirement income solution, particularly one where the amount of income payable is guaranteed, you can provide your clients with the peace of mind that comes from the knowledge that their budgeted essential expenses will be covered regardless of market conditions. Some of these retirement income solutions also provide flexibility that allows for partial or full withdrawals to manage unplanned expenses or a change in circumstances, which importantly, offers adaptability in retirement planning.

Being well-informed is the key to help your clients to overcome misconceptions and foster a deeper understanding of the benefits such products can offer. Let’s address the top five misconceptions.

Misconception: Guaranteed lifetime income products are exceedingly complex

Reality: Advancements in user experience have – and are continuing to – drive simplification

Driven by rapid technological innovation and a stronger focus on user-centric design, today’s retirement income products are evolving towards greater simplicity and accessibility. The era of deciphering dense financial jargon is fading. Instead, new era products embrace intuitive design that makes them easier to use and easier to explain to clients.

Traditional annuities have long been burdened by complexity, but new era solutions prioritise clarity and customer experience. With straightforward features and transparent structures, they eliminate much of the confusion that once left advisers and their clients uncertain.

A key advancement lies in how product features are communicated. Clear explanations, short instructional videos, as well as interactive tools and calculators help demonstrate potential income outcomes. These resources not only enhance your ability to illustrate benefits to your clients but also empower your clients to make more informed decisions about their retirement plans.

The perception that guaranteed lifetime income products are inherently complex is quickly becoming outdated. By placing simplicity and usability at the forefront, modern retirement income solutions are setting a new standard for an intuitive and accessible retirement planning experience.

Misconception: Guaranteed lifetime income products are expensive

Reality: Product innovation, cost efficient structures and economies of scale provide more attractive pricing

The costs of new era guaranteed lifetime income products have steadily declined in recent years, driven by continuous innovation and more efficient product structures. By harnessing advanced technology and sophisticated financial engineering, providers have created solutions that are not only more streamlined and reliable but also significantly more cost-effective to operate.

Digitalisation has been a key catalyst in this transformation. Through the use of technology across product design, delivery and management, providers are achieving economies of scale that were once out of reach.

From automated processes to digital distribution channels, every stage of the product lifecycle has been optimised to reduce overheads and enhance efficiency. As the retirement landscape evolves, your clients can look forward to more affordable and accessible ways to secure the certainty of a dependable lifetime income. 

Misconception: Guaranteed lifetime income products lack flexibility and accessibility

Reality: Traditional annuities may lack flexibility and accessibility; new era products do not

Complexity alone doesn’t explain the historically low take-up of annuities in Australia. Traditional products have also been held back by rigid structures, limited flexibility, high costs and the inability to access capital when needed.

New era lifetime income products have transformed this landscape. They address the shortcomings of traditional retirement income products by combining the certainty of lifetime income with the flexibility to access capital. This offers your clients a compelling balance of security and control.

Unlike traditional annuities, investors no longer face an “all or nothing” decision between guaranteed income and liquidity. These modern solutions provide a dependable income stream in retirement while preserving the ability to draw on capital to meet unexpected expenses.

Flexibility now extends well beyond basic withdrawals. Many products allow your clients to tailor their income streams; to adjust payment frequency, incorporate inflation protection, or customise other features to suit their individual circumstances.

By combining reliability with adaptability, new era retirement income products deliver a powerful solution for clients seeking financial confidence without compromising access to their assets.

Misconception: Guaranteed lifetime income products have limited growth potential

Reality: Retirement income planning should (and can) include growth potential and protection

Retirement planning isn’t only about securing a steady income. It’s also about achieving the right balance between growing assets and protecting against downside risks. As your clients approach retirement, they face the dual challenge of building sufficient wealth to support their lifestyle while guarding against the uncertainties that can erode their savings over time.

Traditionally, investors have relied on growth assets such as equities and managed funds to build their retirement nest egg. While these assets offer strong return potential, they also carry significant market volatility risk, which can pose risks during the drawdown phase and threaten the sustainability of retirement income. Most of your clients will be all too familiar with that in the current environment.

Recognising the need for greater balance, some new era retirement income products integrate growth potential with built-in downside protection. By combining elements of both, they offer your clients the opportunity to benefit from market gains while reducing or even eliminating exposure to downturns.

As part of a diversified portfolio, these products can help clients maintain purchasing power, mitigate the effects of inflation and enjoy a reliable income stream – all with reduced volatility.

Retirement income planning no longer needs to be a trade-off between growth and security. With innovative new era solutions, investors can pursue both and achieve long-term financial confidence without sacrificing protection.

Misconception: Clients aren’t asking for guaranteed lifetime income products

Reality: When presented to clients, or when the question is reframed to specify guaranteed lifetime income, clients do want the features offered

Many of your clients will have a sense of what they want or need from their retirement income solutions, even if they can’t always articulate the specific features or benefits they’re seeking. Clients also tend to have a very clear understanding of their concerns.

A 2025 retirement readiness survey^[6]. identified the three primary factors that impact Australians’ readiness to retire. They are, in order of concern:

1. Inflation
2. The economy
3. Health care expenses

Research has consistently found that Australians favour flexibility in the early years of retirement, balanced by greater security in later years. This aligns closely with the principles of the Retirement Income Covenant, which aims to:

• Maximise expected retirement income
• Manage risks to the sustainability and stability of that income
• Provide flexible access to funds throughout retirement

However, it seems that a gap remains between retirees’ desire for income certainty and the explicit demand from super funds and financial advisers for guaranteed lifetime income products to address that desire.

A range of behavioural factors influence how individuals approach the decumulation phase. Inertia can lead investors to maintain the status quo even when better options exist, while present bias can drive short-term decisions at the expense of long-term security.

Despite these behavioural hurdles, evidence consistently shows that familiarity breeds confidence: as investors, advisers and funds gain a better understanding of the benefits of guaranteed lifetime income, their interest and adoption rates increase.

The key takeout is simple: the better informed your clients are, the more open they will be to solutions that meet their needs, both now and in the future.

Retirement planning can be complex, but challenging outdated perceptions and utilising new era guaranteed lifetime income products can give clients confidence. These products provide a reliable, sustainable income stream to support their desired lifestyle throughout retirement.

New era guaranteed lifetime income products represent a significant opportunity in retirement planning. They combine simplicity, affordability, flexibility and growth potential in a single, comprehensive solution. Advances in technology, innovative product design and a focus on user experience have made these products more accessible and user-friendly than more traditional retirement income solutions.

Not all income is created equal; designing a retirement portfolio requires an understanding of spending hierarchies and income sources, as well as an understanding of structures and solutions to deliver retirement income. These new solutions directly address many of the core challenges of retirement planning. They offer guaranteed lifetime income while providing opportunities for capital growth and protection against market volatility and longevity risk. By balancing growth and security, your clients can build wealth for retirement while mitigating financial uncertainties.

As awareness grows, more Australians are likely to recognise the value of guaranteed lifetime income products as a central component of a robust retirement strategy. With the right strategies in place, you can empower your clients to navigate the complexities of retirement with confidence and clarity.

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Legislated CPD Area: Client Care & Practice (0.25 hrs)

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Notes:
[1] https://www.asic.gov.au/about-asic/news-centre/find-a-media-release/2025-releases/25-235mr-asic-sends-clear-message-to-super-trustees-amid-glaring-retirement-communications-gaps/
[2] https://www.apra.gov.au/news-and-publications/apra-releases-superannuation-statistics-for-june-2025
[3] OECD Pensions at a Glance, 2023
[4] The Future Size of the Super Sector, RBA, December 2024
[5] R Dinham, ‘A close look at retiree fears and expectations’, Firstlinks, 3 February 2021
[6]  https://www.ssga.com/au/en_gb/institutional/insights/global-retirement-reality-report/bridging-the-confidence-gap-australia-snapshot

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at October 2025 unless otherwise specified and is for general information purposes only. It is not comprehensive or intended to give financial product advice. Any advice provided in this material does not take into account your objectives, financial situation or needs. Before acting on anything contained in this material, you should speak to your financial adviser and consider the appropriateness of the information received, having regard to your objectives, financial situation, and needs. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material.

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Understanding your clients’ investment behaviour in retirement to better target your communications, education and insights.

To best understand how and why clients make financial decisions – particularly during retirement – advisers must look beyond technical strategies and consider investor behaviour. Before addressing product selection or income structures, it is crucial to explore the psychological and emotional factors that underpin financial decision-making.

Human behaviour is inherently shaped by a range of cognitive biases, behavioural ‘blinkers which can distort judgement and lead to suboptimal decisions, especially during periods of transition such as retirement. For advisers, the ability to recognise and pre-empt these biases is essential. Doing so not only enhances the advice relationship but also helps clients build confidence, make clearer decisions and achieve greater financial certainty.

This is where behavioural finance becomes an invaluable lens. It examines how real people make financial choices. It acknowledges that many investors are influenced by emotions, limited self-control and subconscious biases. In retirement, these influences can become even more pronounced. Emotion, rather than logic alone, can drive key decisions: when to retire, how to draw down savings, how much to spend and how to react to market volatility. Left unexamined, behavioural tendencies can erode a retiree’s sense of control, affect their spending or investment decisions, and ultimately impact whether they enjoy lasting financial security or risk outliving their savings.

To help clients navigate this, advisers must not only understand behavioural patterns, but they must also frame their advice through the lived experience of retirement. This involves recognising that retirement isn’t a single event, but a multi-phase journey marked by shifting priorities, needs and emotions.

The six stages of retirement

1. Pre-retirement: This stage is marked by a gradual transition away from work and early planning for the future. Individuals begin envisioning their retirement lifestyle and take steps to ensure financial and emotional readiness. Advisers play a central role in assessing financial readiness, exploring income strategies and addressing lifestyle goals.  A personalised retirement plan that incorporates both financial goals and lifestyle preferences, including healthcare, insurance and leisure, lays the foundation for a successful retirement
2. The big event: Whether planned or unexpected, retirement itself marks a major life transition. Advisers help finalise income streams, manage risks such as inflation and longevity, and provide emotional support — particularly in cases of unplanned retirement due to job loss or health issues.
3. The Honeymoon Period: In the early years of retirement, many clients enjoy newfound freedom. This “honeymoon” phase can last months or years, varying greatly among individuals. While retirees indulge in travel and hobbies, advisers help them create sustainable spending plans and ensure essential expenses are covered. Guidance on managing investments during this time is crucial, especially to protect against early market downturns that could jeopardise long-term financial health.
4. Disenchantment: For some, initial excitement fades and is replaced by uncertainty or dissatisfaction, often related to identity, purpose or finances. Advisers can help by revisiting financial and lifestyle plans, realigning goals, and exploring new avenues for engagement such as part-time work or volunteering. This stage is about helping clients rediscover purpose and adapt to the realities of retired life.
5. Reorientation: This is a time for self-reflection and adjustment and clients begin to redefine what retirement means to them. Advisers assist with recalibrating lifestyle and financial plans to reflect evolving values and aspirations, ensuring alignment with long-term objectives. Regular check-ins ensure plans remain relevant and meaningful as priorities shift.
6. Retirement Routine: Clients settle into a lasting rhythm. This phase, which may last many years, still requires active financial oversight. Advisers continue to review financial strategies, manage health-related needs, and help clients adapt to emerging opportunities or challenges. Adjustments might include changing living arrangements or reallocating funds to match new goals or circumstances.

Behavioural insights

A study by Professor Shlomo Benartzi of UCLA^[1], sponsored by Allianz of America, highlighted key behavioural insights for retirees. Knowing these can help you guide clients past common biases for better outcomes, whatever their stage of retirement.

Behavioural insight one: Framing

Framing refers to the way people interpret information based on how it’s presented, rather than on the objective facts alone. In retirement, as clients shift from growing their wealth to generating income, it becomes essential to reframe financial conversations accordingly.

For example, asking a retiree to calculate the investment return they need to meet annual expenses may feel abstract or disconnected. In contrast, asking how much income they need each month to cover their bills is more tangible and relatable. In this context, how the conversation is framed can significantly influence the client’s understanding, mindset, and decision-making. The right framing can help clients focus on what truly matters: financial stability and confidence in retirement.

Behavioural insight two: Vividness

Imagining life 20 years into the future can be difficult — yet that’s exactly the mindset clients need when making financial decisions about retirement.

A study by Professor Daniel G. Goldstein and the London Business School explored this concept by using virtual reality. Participants viewed an age-morphed version of themselves in a mirror and were then asked to allocate funds between current expenses and a retirement account. Those who saw their future selves were more than twice as likely to contribute to retirement savings than those who saw their present-day reflection.

While advisers don’t need VR technology to create impact, similar outcomes can be achieved through practical tools, scenario-based case studies and real-life comparisons. These methods help clients connect emotionally with their future selves, making it easier to understand how today’s financial choices can directly shape their future lifestyle and sense of security.

Behavioural insight three: Hyper loss aversion

Hyper loss aversion describes the heightened sensitivity to financial loss that often increases with age. While individuals in the accumulation phase typically fear losses about twice as much as they value gains, retirees may fear losses up to ten times more. This amplified fear can significantly distort decision-making, particularly when faced with market volatility or the prospect of negative returns.

For retirees, the emotional weight of potential loss can lead to overly conservative or reactive investment choices, which may jeopardise long-term outcomes. That’s why maintaining a sense of control and flexibility is critical. A well-constructed retirement portfolio should include solutions that offer income with a high degree of certainty, helping clients feel more secure and in control of their financial future.

Importantly, retirement strategies must be designed with behavioural realities in mind. Addressing loss aversion, especially in clients who are hyper-sensitive, requires balancing emotional comfort with protection against retirement-specific risks such as longevity and sequencing risk. By doing so, advisers can help clients make more confident, resilient financial decisions in retirement.

Behavioural insight four: Cognitive impairment

While ageing brings valuable experience and insight, it can also affect cognitive function and decision-making abilities. Research has shown that older adults often experience a decline in analytical cognitive functioning; the capacity to learn, reason, remember and solve problems. The same study also revealed a significant drop in financial literacy, including difficulties with numeracy and interpreting visual data like charts and tables.

For retirees, this decline can make it especially challenging to grasp complex financial concepts such as sequencing risk and its potential impact on their retirement savings. When cognitive ability diminishes, even well-informed individuals may struggle to make sound decisions about managing and protecting their income.

To support clients in maintaining financial security and confidence in retirement, it’s important to encourage early and proactive planning. This can include:

1. Locking in a retirement strategy as early as possible to reduce the need for complex decisions later in life.
2. Considering capital protection measures to safeguard retirement savings from significant losses.
3. Securing a regular income stream, ideally through solutions that offer guaranteed lifetime income.
4. Maintaining access to capital to provide flexibility for unexpected expenses or changing needs.

By taking these steps, advisers can help clients protect their financial wellbeing and reduce the cognitive burden of managing complex decisions later in retirement.

Behavioural insight five: Tangible mental accounts

The fear of outliving retirement savings and experiencing investment losses is very real for retirees who rely on their existing assets to generate regular income. At the same time, they may also require access to capital; for example, for unexpected medical expenses or lifestyle goals such as travel.

A practical way to help clients manage these competing needs is by identifying their specific goals and dividing them into separate ‘buckets’. This mental accounting approach allows clients to clearly see how their money is allocated, making it easier to control spending and tailor investment strategies to match each purpose.

For instance, a bucket designated for essential expenses – such as utilities, medications, and groceries – can be invested conservatively to prioritise stability and security. In contrast, a bucket for discretionary spending – such as holidays or luxury purchases – may be invested with a higher risk tolerance to seek growth.

This can be taken a step further by labelling these buckets with meaningful names (e.g. “Everyday Living,” “Health and Care,” “Travel Dreams”) – this adds a personal and emotional connection. It makes the strategy more relatable, helps reinforce spending discipline and provides a clear framework for ongoing conversations about needs, lifestyle goals, and how to best align investments with both.

Behavioural insight six: Inertia

In behavioural finance, inertia refers to the tendency to stick with the status quo, often driven by fear of making the wrong decision, a sense of being overwhelmed, or simply a preference for the familiar. This resistance to change can lead to inaction or a reluctance to revisit past choices, even when circumstances suggest a different course would be more beneficial.

Inertia can be particularly problematic in retirement planning. It may cause clients to delay important financial decisions, avoid necessary portfolio adjustments or remain in underperforming investments.

However, inertia isn’t always negative. In some cases, it can work in a retiree’s favour. For example, by preventing them from reacting emotionally to short-term market fluctuations and abandoning a sound long-term strategy.

Understanding what’s driving inertia – whether fear, decision fatigue, or a desire for comfort – is key to helping clients move forward. Dislodging these behaviours often requires more than logic; it requires tapping into emotional motivation.

Advisers can turn inertia into a tool by setting up default strategies that support good outcomes. Additionally, breaking major changes into smaller, more manageable steps can reduce resistance. Clients are more likely to accept a series of small adjustments than a single large shift. This approach provides a sense of control and reduces decision anxiety, making it easier for retirees to act, even if that action is simply staying the course on a well-constructed plan.

Behavioural insight seven: Evaluability

Evaluability refers to our natural tendency to prefer making decisions based on simple, like-for-like comparisons. When faced with two options, one easier to understand than the other, people often choose the simpler option, even if it’s not the most suitable for their needs. This bias can lead to decisions based on ease of evaluation rather than actual value or effectiveness.

Professor John Payne of Duke University^[2] highlights that to counter evaluability bias in retirement income planning, advisers should adopt a new approach to communication – one that frames product features and outcomes in measurable, relatable terms. This means avoiding unnecessary complexity or industry jargon and instead presenting clear, quantifiable comparisons that are relevant to each client’s personal circumstances.

Using an “apples-with-apples” comparison approach can help clients better assess options, but it’s equally important to contextualise those options within the client’s broader retirement goals. Without this context, there’s a risk that more complex, yet potentially more suitable, solutions are dismissed simply because they’re harder to evaluate.

In retirement planning, this bias can lead to missed opportunities. To keep things simple, clients may reject sophisticated products that offer better protection, income certainty, or longevity management. As retirement income products continue to evolve, advisers need to help clients see beyond surface-level simplicity.

It is important that you and your clients remain open-minded. Many modern retirement solutions come with inherent complexity, but when evaluated through a structured lens, considering likely benefits, consequences and costs, their value becomes clearer. Interactive tools, scenario simulators or case studies can help translate complex options into relatable, real-world outcomes. This makes it easier for clients to understand and engage with the best strategy for their retirement.

Behavioural insight eight: Money illusion

Most people underestimate the long-term impact of inflation on their retirement savings. They tend to think in nominal dollars – focusing on current prices – rather than adjusting for how inflation erodes purchasing power over time. This can have serious consequences for a retiree’s standard of living and overall quality of life.

The value of a dollar today won’t be the same in 10, 15 or 20 years. Even modest inflation rates can significantly diminish purchasing power. For example, a three percent inflation rate compounded over 10 years reduces purchasing power by around 25 percent. Over 20 years, that same rate can cut it by nearly half. For retirees on a fixed income or drawing from a set pool of savings, this erosion can mean falling short of covering essential expenses like healthcare, housing or everyday living costs.

This disconnect is known as the money illusion – the tendency to focus on nominal dollar amounts rather than real (inflation-adjusted) values. Research has shown that people often base decisions on the face value of money, overlooking how inflation affects its actual worth. For instance, preferences between inflation-indexed and non-indexed income streams can shift dramatically depending on how the risk is framed.

Fortunately, the money illusion can be mitigated. The same study found that when the effects of inflation on real dollars were clearly demonstrated, people were more likely to make informed, rational choices. This highlights the importance of how information is presented.

For advisers, helping clients understand the true, inflation-adjusted value of their future income is essential. Using simple tools or visual aids to show how inflation impacts long-term purchasing power can lead to better decisions – and help ensure clients are financially prepared not just for retirement, but for the decades that follow.

Behavioural finance checklist

Behavioural finance has the potential to reshape the financial lives of retirees and can help add a human dimension to the design of a client’s retirement income strategy. The following checklist^[3] has been designed to provide a practical framework of questions to explore with clients to help overcome these common bias and cognitive behaviours.

The checklist provides a question derived from each of the above insights.

1. Is the retirement income strategy framed in terms of the monthly income a retiree will receive?
2. Are the implications of today’s financial decisions vividly presented so clients see how their future life will be affected?
3. Is the strategy appropriate for retirees who are hyper-sensitive to losses?
4. Are the number and complexity of choices manageable for older individuals?
5. Can retirement income decisions be made before the onset of cognitive impairment?
6. Do your clients’ retirement income strategies offer flexibility for multiple accounts to facilitate different goals, such as paying the rent or spending money on holidays?
7. Are retiree investors, carried by inertia, assigning themselves to the most appropriate investment options?
8. Does the language and context used to describe the retirement income strategy make it easy to evaluate its features as they relate to the client?
9. Does the retirement income strategy provide some inflation protection?

The transformative power of behavioural finance goes far beyond theory – it has real, lasting implications for the financial wellbeing of your clients. By weaving behavioural insights into the advice process, you can strengthen retirement income strategies while addressing the human factors that so often drive decision-making.

Retirement is not a single event, but a dynamic and evolving journey made up of distinct stages, each bringing its own challenges, emotions and financial considerations. Recognising the behavioural biases that can shape your clients’ choices is key to helping them avoid common pitfalls and stay aligned with their long-term goals.

By combining a deep understanding of investor behaviour with a structured approach to the six stages of retirement, advisers can offer more personalised, empathetic and effective guidance. This empowers clients to face both the emotional and financial complexities of retirement with greater clarity and confidence and ultimately support a retirement that is not only financially secure, but personally fulfilling.

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References:
[1] Behavioural Finance and the Post-Retirement Crisis, Shlomo Benartzi, UCLA, 29 April 2010
[2] Simonson, I., Bettman, J. R., Kramer, T., & Payne, J. W. (2013). Comparison selection: An approach to the study of consumer judgment and choice. Journal of Consumer Psychology
[3] Behavioural Finance and the Post-Retirement Crisis. Prepared by Shlomo Benartzi, UCLA. Sponsored and submitted by Allianz of America, 29 April 2010; A Behavioural Finance Checklist for Retirement Income Strategies

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at August 2025 unless otherwise specified and is for general information purposes only. It is not comprehensive or intended to give financial product advice. Any advice provided in this material does not take into account your objectives, financial situation or needs. Before acting on anything contained in this material, you should speak to your financial adviser and consider the appropriateness of the information received, having regard to your objectives, financial situation, and needs. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material.

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What are the retirement income strategies available for your clients?

There’s a wide variety of income strategies used across the market, with an equally wide variety of labels attached to these strategies. Each varies in complexity, its ability to mitigate the unique risks of decumulation and the degree of personalisation available.

Ranked in order of complexity and personalisation (lowest to highest), these strategies include:

1. The same strategy and asset allocation as used in accumulation
2. A more conservative allocation
3. Simple bucketing
4. Complex bucketing
5. Income layering

Terms such as ‘layering’ and ‘bucketing’ are frequently heard, although the definitions applying to these terms are not always consistent.

Common retirement income strategies

Bucketing strategies

A bucketing strategy aims to balance the need for ongoing income, capital preservation and capital growth throughout retirement by establishing and maintaining different pools of savings, each with their own purpose and liquidity needs. The central idea is to divide retirement savings into separate “buckets,” each with a specific purpose, time horizon and risk profile. The objective of a bucketing strategy is to ensure that retirees have sufficient liquidity to meet short-term needs, while still allowing a portion of their portfolio to grow over the long term.

A basic bucketing strategy typically consists of three buckets:

1. The short-term bucket: This is the most liquid portion of the portfolio, usually containing cash or cash equivalent investments. Its primary function is to provide stable and reliable income for immediate living expenses and typically covers the next one to three years. Because these funds need to be readily available, this bucket is invested for stability not growth and is therefore generally immune from volatility.
2. The medium-term bucket: This bucket serves as a bridge between short-term needs and long-term growth. It usually includes a more conservative or balanced portfolio, to strike a balance between income stability and some potential for capital appreciation. It typically covers a time horizon of three to seven years and may be used to replenish the short-term bucket as needed.
3. The long-term bucket: Designed for capital growth, this bucket contains higher-risk investments such as equities or growth-oriented managed funds or ETFs. It is intended to fund the later stages of retirement and combat inflation and longevity risk. Because of its longer investment horizon – typically more than seven years – this bucket can ride out market fluctuations, with the understanding that positive returns over time will support future income needs. Positive returns from the long-term bucket can be used to top-up or repair the short-term bucket. If the market falls, the aim is not to sell from this bucket.

When managed properly, this strategy allows retirees to draw income from the short-term bucket while giving the medium- and long-term investments time to recover from market downturns. More sophisticated versions of the strategy may involve additional buckets, each aligned with specific financial goals, and a more dynamic approach to rebalancing and replenishing the buckets based on market conditions and life events.

Layering strategies

Layering is a retirement income strategy that focuses on building financial security through distinct layers of income, each tailored to meet specific types of expenses or financial goals. Unlike bucketing, which is primarily an asset allocation approach based on investment time horizons and liquidity, layering involves aligning different types of financial products with the purpose of generating income to support various lifestyle needs throughout retirement.

Each “layer” corresponds to a different category of retirement spending:

1. The basic layer: This layer covers essential, non-negotiable living expenses such as food, housing, utilities and transportation. These are the costs that must be met consistently, regardless of market conditions or personal circumstances. Income for this layer is ideally sourced from stable, predictable products such as the Age Pension or guaranteed retirement income streams.
2. The contingency layer: This is designed to cover unexpected or irregular expenses, such as emergency medical costs, home repairs or the replacement of major appliances. Flexibility is key here, and funds for this layer often come from more liquid or easily accessible accounts, such as an account-based pension or savings account.
3. The discretionary layer: This layer funds the retirement lifestyle elements, expenses such as travel, hobbies, dining out or gifting. As these are not essential expenses, this layer can generally tolerate more risk and variability in income, although that may be dependent on the client’s retirement objectives. The discretionary layer is often supported by investment income from superannuation or other investments.
4. The legacy layer: For those who wish to leave a financial legacy, this final layer is aimed at estate planning and providing for beneficiaries. This can be achieved through investments, trusts or insurance-based products.

Innovative income stream products and annuities are increasingly being used to support this structured approach. Layering typically provides retirees with a flexible and resilient framework to navigate financial needs as they evolve over time.

Towards more retirement-risk aware strategies

Other common retirement income strategies include:

Protected income approach

The protected income approach focuses on ensuring a stable, predictable income stream to cover essential living expenses, regardless of market conditions or longevity. Central to this approach is the use of annuitisation, both immediate and deferred, to create a reliable income “floor” that safeguards clients against the risk of outliving their savings or experiencing substantial losses during market downturns.

At its core, the protected income approach aims to deliver downside protection in retirement by locking in a guaranteed income stream. This is particularly important for covering non-negotiable expenses such as housing and food. By securing income for these essential needs, your clients can gain peace of mind, knowing that their basic lifestyle is not dependent on market performance.

Total return approach

The total return approach involves drawing income from a diversified investment portfolio, rather than relying on fixed or contractual income sources such as annuities. This strategy is typically suited to individuals who value flexibility, prefer to retain control over their capital, and are comfortable managing a certain level of investment risk in exchange for potentially higher long-term returns.

Under the total return approach, clients would generate income by combining interest, dividends, and capital gains from a well-diversified portfolio. Capital growth helps preserve the portfolio’s longevity, counter the effects of inflation, and provide for future spending needs.

This approach requires careful asset allocation and regular portfolio rebalancing to maintain an appropriate level of risk and return. Typically, portfolios are diversified across a mix of equities, bonds, and alternative assets to balance growth potential with downside protection.

Risk wrap approach

The risk wrap approach is a modern retirement income strategy that aims to combine the growth potential of market-based investments with the security of guaranteed lifetime income. This approach is particularly attractive to clients who want to participate in market growth but also desire the peace of mind that comes with knowing a portion of their income is protected, irrespective of market performance.

At the heart of the risk wrap strategy are annuities and innovative income stream products that come with income guarantees. These products are often referred to as “wrapped” because they wrap a layer of protection – such as a guaranteed income benefit – around an investment portfolio. This allows retirees to remain invested in growth assets while still securing a minimum level of income for life.

For example, a client might invest in a product that tracks the performance of a diversified portfolio but includes a guaranteed minimum income feature. If the investments perform well, the retiree can benefit from upside growth through increased account value or income potential. However, if the market performs poorly, the product still delivers a pre-determined income floor, ensuring that the retiree will not run out of money, no matter how long they live.

This strategy addresses several key retirement risks, including longevity risk and sequencing risk. By blending protection with growth, the risk wrap approach provides a balanced solution that appeals to those who want both control and security.

Retirement Income Styles Assessment

The Retirement Income Style Awareness (RISA)^[1] assessment is a framework developed to help individuals better understand their personal preferences, attitudes and financial goals as they transition into retirement. The outputs from the RISA are based on a broader conceptualisation of risk as it pertains to income preferences and risk tolerance.

RISA identifies key psychological and financial decision-making traits that influence how a client might prefer to generate income in retirement. The goal of the assessment is to match clients with the retirement income strategies most aligned with their values, their comfort with risk, and expectations for security and flexibility.

Mapping individuals along two dimensions (optionality v commitment and safety-first v probability) allows them to be aligned with one of four retirement income strategies (figure one).

The RISA assessment evaluates individuals across two core dimensions. The first is ‘safety first’ versus ‘probability based’. This dimension captures a client’s preference for relying on market-based solutions versus guaranteed income sources.

Clients who identify as safety first generally prioritise guaranteed income and prefer contractual solutions such as guaranteed lifetime income streams.

Those clients who identify as probability based are generally comfortable depending on investment returns and managing portfolio withdrawals to support their retirement income.

The second core dimension is optionality versus commitment. This dimension reflects a client’s desire for flexibility and control versus a willingness to commit assets in exchange for financial certainty.

Those clients who are optionality focused prefer strategies that allow for future adjustments and maintain liquidity. Conversely, commitment focused clients value predictability and are open to locking in financial guarantees.

From these two dimensions, four primary retirement income styles emerge:

The RISA assessment is typically administered as a questionnaire that measures an individual’s preferences across these spectrums. Financial advisers can use the results to tailor retirement income plans that align with the retiree’s psychological comfort and lifestyle goals.

Although the RISA tool was developed in the United States, the theoretical underpinnings are equally applicable in other markets; except for questions relating to US-specific products and legislation, the questions used in the assessment are just as relevant in an Australian context.

Ultimately, the RISA framework can empower clients to make more informed, personalised decisions that increase the likelihood of financial satisfaction and security throughout retirement.

Retirement income product toolkit

Most advisers call on a small core of established, widely available product solutions to support the retirement income strategies they design for clients. Typically, a strategy will involve numerous solutions working in conjunction to deliver different objectives within that strategy (figure two).

The Age Pension can act as a crucial source of income certainty, and maximising pension eligibility is often a key objective for your clients. However, not all clients will be eligible for the Age Pension, and over time it is expected that the proportion of retirees who are entirely self-funded will grow.

Outside the superannuation system, the solutions called on by advisers will typically include those offering liquidity (such as cash and fixed interest) and those offering access to equity markets, including ETFs.

Traditional retirement income solutions

Annuities are used for a variety of purposes, either as de facto term deposits (term annuities), or to create a degree of income certainty (lifetime annuities).

Lifetime annuities are available inside and outside the superannuation system, and this is a class of product getting more sophisticated, with CPI and market-linked solutions available. The lack of flexibility in traditional lifetime annuities can, however, be a barrier for some.

The Account Based Pension (ABP) remains the most common decumulation solution for superannuation savings, offerings that are becoming more sophisticated.

New-era innovative lifetime income streams

New-era lifetime retirement income streams are a new style of retirement income product, designed to provide your clients with greater choice and flexibility when considering their retirement product options, helping them manage the risk of outliving their retirement savings and enhancing their standard of living in retirement. They are designed to overcome some of the common objections that your clients may have to traditional lifetime income stream products.

ABPs alone do not mitigate the key retirement risks

The flexibility of ABPs means they can work very well in conjunction with other solutions, such as the Age Pension and annuities, and subject to mandatory minimums, can be integral to a dynamic drawdown strategy. However, they are not a mitigant against sequencing risk, inflation risk, or longevity risk, and as such cannot offer income certainty to your clients.

Traditional solutions offer flexibility or certainty, not both

Today, more than ever, your clients want the confidence to spend and enjoy the continuity of their lifestyle once retired. For this, they need certainty and flexibility from their investment strategies, as well as solutions to the unpredictable financial outcomes they’ll likely face in retirement.

At one end of the spectrum, ABPs provide flexibility but can leave retirees shouldering significant investment and longevity risk and fail to fully address the financial fears held by retirees.

At the other end, traditional lifetime annuities involve trade-offs between income certainty and flexibility and are often limited in terms of how one can invest, withdraw or use their money.

The Age Pension, upon which many Australians rely on, barely provides enough income to sustain a subsistence level of retirement. As life expectancies increase and living costs rise, the strategies and products previously relied upon are becoming less effective in addressing the need for certainty.

Next-generation retirement income solutions can provide certainty and flexibility

A 2022 Actuaries Institute report^[2] noted that combining traditional products with new-era innovative lifetime income stream solutions could lead to a remarkable 30 percent increase in retirement income.

Further, the report noted that methods, such as using investment-linked lifetime income streams, have been shown to lift retirement income without increasing longevity risk: a win-win outcome that would see Australian retirees benefit from larger payments and a better quality of life without increasing the likelihood of outliving their savings.

The next generation of retirement products must improve on earlier efforts, with outcome-oriented solutions designed around core features, including:

While conventional wisdom suggests starting retirement income planning at least a decade before retirement, many individuals delay these critical conversations until much later. This delay can limit the effectiveness of available strategies. However, the emergence of new-era income solutions offers both an opportunity and a strong incentive to shift this timeline forward. By engaging clients earlier, during the accumulation phase, advisers can help build more robust, flexible retirement income plans that better support long-term financial wellbeing. Starting the conversation sooner is not just beneficial, it’s essential.

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Notes:
[1] Professor Pfau and Alex Murguia, CEO of Retirement Researcher, developed the RISA questionnaire and matrix after surveying scores of retirees about their preferences
[2] https://www.actuaries.asn.au/Library/MediaRelease/2022/TheDialogue.pdf

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at June 2025 unless otherwise specified and is for general information purposes only. It is not comprehensive or intended to give financial product advice. Any advice provided in this material does not take into account your objectives, financial situation or needs. Before acting on anything contained in this material, you should speak to your financial adviser and consider the appropriateness of the information received, having regard to your objectives, financial situation and needs. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material.

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How to understand alternative ways to assess client risk tolerance in retirement.

In our last article, we examined the common risks that can impact retirement. The financial risks we’re all acutely aware of: longevity risk, inflation risk, market risk and sequencing risk. Any and each of these risks can exacerbate other risks and derail retirement. There are of course the behavioural risks that can intersect with financial risks and often lead to poor decision making.

The objectives and strategies applicable to the accumulation phase of retirement savings are different to those applicable to the drawdown – or decumulation – phase. Similarly, the risks faced during decumulation are significantly different, and simply applying a more conservative investment approach is likely to lead to sub-optimal outcomes for the individual

Decumulation is not accumulation in reverse

While the miracle of compounding is arguably the main driver of retirement savings outcomes over a client’s working life, decumulation brings forward several forces that can significantly interrupt this compounding. These forces are significant risks to be managed, and include:

• Dollar-cost averaging is no longer an opportunity, it’s a threat
  Regularly selling assets to deliver consistent income flows will mean some assets will be sold when the market is down, leaving the investor to either sell more assets, or have a lower income to live on.
• Liquidity considerations are elevated
  A portfolio designed to deliver a sustained income over decades will likely need to balance the higher earnings potential of more illiquid assets with the liquidity required for planned and unplanned drawdowns.
• The stakes are higher
  This is particularly pertinent in the early stages of decumulation, when the savings pool is at its peak.
• Fewer opportunities for recovery
  This is especially pertinent for those who retired several years ago, and for whom returning to the workforce is more difficult.
• Behavioural risks intersect with market risks
  Volatile markets can increase the chance of an individual crystallising losses during market dips.

Other ways to consider risk in retirement

To the extent that decumulation brings forth a unique set of risks not relevant to accumulators, the assessment of these risks requires a different approach. There are several reasons why the techniques used to assess risk for clients in the accumulation phase are inappropriate for decumulation scenarios:

1. They often concentrate more on attitude to risk more than the capacity to tolerate risk.
2. Many questions don’t make sense in a decumulation scenario; they are typically focused on reaction to portfolio losses rather than the changes in the size and stability of income flows.
3. Risk profiling in the accumulation phase helps to decide how aggressively a client can be invested in equities. It does not help to differentiate between appropriate strategies and products for retirement.
4. Investors in the accumulation phase generally pay less regular attention to their portfolio, a separation between an investor and their portfolio that no longer exists in decumulation. Those investments are now being scrutinised and accessed more regularly; therefore behavioural risks are therefore higher.
5. Risk assessments often take place infrequently, meaning they don’t reflect the dynamic nature of risk and the changing attitudes (and needs) of your clients in different stages of retirement.

Risk tolerance v risk capacity

In most instances, risk capacity – the financial ability to absorb losses – is the chief determinant of the suitable level of risk for an investor to take. However, the experience around the world – likely to be replicated in Australia – is that many risk assessment processes conflate risk tolerance (the psychological attitude to risk) with risk capacity, despite the fact they should be assessed separately.

In the UK for example, a recent study by the financial regulator (FCA) found only 30 percent of advice firms were using separate processes for assessing the two^[1].

Further problems can occur with risk capacity assessments that are subjective guesses, or which focus on pots of money – each with their own arbitrary goal – and fail to reflect how an investor’s goals interact with each other over time.

Poor – or absent – risk capacity assessments can lead to an investment approach that is either too aggressive, increasing the risk of knee jerk investor behaviour, or too conservative, threatening the sustainability of income flows.

Inappropriate questions

Accumulation strategies are generally singular in their focus: to maximise the total investment returns achieved to grow each client’s retirement portfolio as much as possible.

Investors are generally advised to invest as aggressively as possible to earn the greatest risk premium from the stock market over the long-term, subject to their comfort with short-term market fluctuations. With the passage of time, market volatility will often balance out into a greater growth rate over time.

Traditional risk tolerance questionnaires have therefore been designed to help advisers identify the amount of volatility their clients can stomach within their investment portfolios – which is likely to be quite different to their attitude to income stability or certainty in retirement.

Whereas for accumulators, questions about whether risk is something to be feared, or an opportunity for upside, are likely to be relevant. For decumulators, questions designed to measure sensitivity to loss will make far more sense.

The same FCA study referred to previously found that 77 percent of advisory firms in the United Kingdom used the exact same process and questions for assessing the risk attitudes of both accumulators and decumulators.

Risk profiling doesn’t help to determine strategy

Traditional risk profiling outputs are designed to help advisers match the allocation between growth and defensive assets to a client’s individual risk tolerance. And, notwithstanding the growth of alternative investments, growth assets are largely seen to be direct equities, or equity-based products such as managed funds, exchange traded funds or separately managed accounts.

The sequence is usually to (1) determine the appropriate asset allocation and (2) decide on the right products to meet the client’s objectives.

For those clients in decumulation mode however, there are so many different product solutions – catering for different client needs for flexibility and certainty – that the sequence needs to be reversed. The choice of strategy – which should include the use of different types of annuities and new innovative income stream products – should be made before any asset allocation decisions.

A suitable risk profiling approach in decumulation should therefore help shed light on the appropriate strategy and product selection.

Lack of separation understates behavioural risks

Accumulators are generally making long-term investment decisions about assets they don’t intend to access for some time. As such, there is a degree of psychological separation from these funds that likely manifests as a higher risk tolerance. This is especially true of superannuation funds, which are inaccessible until age 60, and therefore for many investors don’t feel ‘real’.

In decumulation however, individuals become more engaged with their savings. They need to access them and make decisions about their savings on a far more frequent basis. Increased loss aversion is natural for retirees, but often one’s true attitude to losses isn’t known until a loss is experienced.

Risk profiling processes geared around accumulation may therefore underestimate an individual’s true aversion to loss. In turn, this can lead to increased risk of value destructive behaviour.

Risk is dynamic, not ‘set and forget’

Attitudes to, and capacity for, risk is dynamic. Attitudes and capacity typically evolve over time in response to changes in a client’s circumstances and goals. Changes in income, employment status, health, relationships and living arrangements can all impact a person’s capacity and willingness to take on investment risk.

Any reliance on an initial risk profiling process to remain accurate throughout a client’s life is, therefore, highly misplaced.

A best practice approach to measuring attitude to risk in decumulation

There is much scope for an improved approach to retirement income strategies in Australia (a fact called out by ASIC and APRA in their 2022 Retirement Income Covenant Review). A valuable starting point is to look to the experiences of other similar developed markets, namely the United Kingdom and United States.

Gauging the need for certainty

Internationally recognised US retirement planning academic Professor Wade Pfau is one of many experts who believe a new approach is needed to:

1. Assess retiree attitudes to risk
2. Develop retirement income strategies aligned to those risks

His latest work in this area is the Retirement Income Styles Awareness (RISA) Profile^[2]. The RISA profiling tool was developed after years of research by Pfau and colleagues, which identified retiree attitudes towards funding essential living expenses as one of the key determinants of their retirement income ‘style’.

The tool maps retirees along two dimensions:

1. Safety first versus probability
2. Optionality versus commitment

A client who nominates safety first retirement income sources will typically look to incorporate defensive and protected capital solutions to better secure their retirement savings. The income provided by these sources is less exposed to market swings or comes with some degree of capital protection. Although no strategy is entirely safe, a focus on defensive and capital protected strategies implies a relative degree of safety compared to the less certain market outcomes of probability-based income sources. A safety-first approach will generally forgo any upside potential of probability-based income sources for the relative assuredness of a contractual guarantee.

Where a client indicates a preference for a probability income style, it specifies a willingness to gravitate toward retirement income sources dependent on the potential for market growth to provide an ongoing retirement income stream. These include traditional diversified investment portfolios and other growth assets. They are predicated on the idea that while market growth is not guaranteed, markets have grown over time and the probabilities for cumulative growth tend to rise as the time horizon increases. While market returns are not guaranteed, some retirees are comfortable taking the probability bet.

Optionality reflects a client’s preference for keeping their options open and remaining flexible so they can respond to changes in the economic landscape or their personal circumstances. This preference aligns with retirement income solutions that are easily adjusted and do not have predetermined holding periods.

On the other hand, commitment reflects a preference for committing to one solution. In this scenario, your client would not feel the need to keep their options open. Instead, they are willing to select a particular retirement income solution to meet their needs. Clients who prefer commitment often get satisfaction from advance planning.

Mapping individuals along these dimensions allows them to be aligned with one of four retirement income strategies.

Questions to determine retirement income ‘styles’

The first question aims to gauge a client’s views on how they expect to fund their retirement income.

An example of a question to assess this dimension is:

Which of these two statements most closely reflects your views on retirement income planning?

“I see my investment portfolio as funding the majority of my retirement expenses.”

or

“I see my essential retirement expenses funded, to the extent possible, from protected income sources, with the rest of my expenses funded by my investment portfolio.”

A second question then seeks to gauge a client’s preference for a flexible approach, versus the certainty that comes from committing to a particular strategy throughout retirement.

An example of a question for this dimension:

How much do you agree with the following statement?

“I prefer more flexible retirement income strategies to accommodate my changing preferences as I age.”

The responses to these and other questions in the RISA profiling tool allows individuals to be mapped to one of four retirement income strategy quadrants. The strategies underpinning these quadrants are similar in nature to those used by Australian advisers, albeit with different labels (figure one). This will be discussed in more detail in a future article.

Other questions to gauge attitudes to income risk

The previously mentioned FCA review of retirement income advice in the UK spurred a flurry of work and commentary around income risk, and its foundational importance in developing retirement income strategies aligned to individual needs and attitudes.

Commentary also focused on the development of questions more suitable for assessing attitudes to income risk, rather than investment risk. Even subtle changes to the questions used in accumulation can make a significant difference.

For example, in accumulation, it may be appropriate to ask a client whether they are willing to take more risk in the hope of higher returns. In decumulation, it might be more relevant for the client to consider whether they value a stable lower income or would rather take more risk in exchange for the potential for higher, but also more variable, perhaps ultimately lower, income.

Similarly, in accumulation, it makes sense to ask whether a client seeks risk as something to be feared, or an opportunity for upside. In decumulation, it is more appropriate to measure sensitivity to loss.

It may also be appropriate to tweak the client fact find used with pre-retirees, or at the very least look at the outcomes through a different lens.

Questions to gauge attitudes to income risk could include:

• What are your daily living expenses?
• Do you have a cash buffer to cover unexpected expenses?
• Do you have dependents that rely on you for money?
• Are your income requirements likely to change in the future?
• Have you considered how you would fund aged care?
• Do you have any large expenses planned?
• Are you expecting to receive an inheritance?

Use of cash flow modelling for risk capacity assessment

In Australia, cash flow modelling is typically thought of as a form of advice – typically used with younger clients – rather a risk modelling tool. But in the UK, cash flow modelling is seen as a primary tool for assessing capacity for risk.

Experts agree a diligent and comprehensive cash flow model is the most accurate way to assess risk capacity, with the ability to model the income effect of different degrees of investment loss central to this calculation.

As part of its thematic review of retirement advice, the Financial Conduct Authority recently published guidance on improving the quality of cash flow modelling for retiree and pre-retiree clients. Areas they highlighted for improvement included verifying the accuracy of client-provided data and using realistic return assumptions^[3].

Another problem identified in the FCA review was the common use of ‘average’ life expectancy (rather than adjusted), and the failure to stress test different outcomes in line with different investment return scenarios.

As the importance of the retirement income sector grows, the use of cash flow modelling for retirees and pre-retirees is likely to become more common.

Retirement throws up many psychological challenges, and unsurprisingly, many advisers working with retirees find their role in providing emotional support and nonfinancial guidance is just as important as the financial advice they give.

The loss of income, social contact, and routine can prove daunting for many, especially those whose retirement was unplanned (perhaps due to redundancy or ill health).

People who have long, successful, enjoyable careers may suddenly find they lack focus, or even purpose, and may have diminished self-worth. Boredom can easily creep in, and mental health can suffer. A perceived loss of financial independence and fear of being a burden on others can also loom large.

Effectively managing financial risks and ensuring a clear understanding of your clients’ risk capacity and desire for both flexibility and certainty are essential components of successful retirement planning. When these factors are well understood by all parties, the likelihood of achieving a comfortable and secure retirement is significantly increased. Prioritising these factors can provide greater peace of mind and financial stability as clients approach their retirement years.

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References:
[1] Assessing customer risk profiles at retirement requires a dedicated tool
[2] Why Risk Tolerance Questionnaires Don’t Work for Determining Retirement Strategies
[3]  Undertaking cashflow modelling to demonstrate suitability of retirement-related advice

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at April 2025 unless otherwise specified and is for general information purposes only. It is not comprehensive or intended to give financial product advice. Any advice provided in this material does not take into account your objectives, financial situation or needs. Before acting on anything contained in this material, you should speak to your financial adviser and consider the appropriateness of the information received, having regard to your objectives, financial situation and needs. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material.

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What are the risks that retirees face and how do these risks affect the security of their long term retirement funding?

Australian retirees face both controllable and uncontrollable risks that can impact their retirement savings. This article from Allianz Retire+ explores these risks and the potential financial and emotional impacts on your clients.

By 2030, all baby boomers will be 65 or older. Sometimes described as a ‘grey tsunami’, there is no doubt this generation will be one of the largest retired cohorts in history. As this group transitions from accumulation to decumulation over the next decade or so, their investment objectives will change from amassing wealth to generating retirement income to meet their lifestyle goals. Their risk-return objectives will also transition: from ‘maximising returns for a given risk tolerance’ to ‘creating greater certainty of income’.

Unlike many in the generations before them, most baby boomers plan to enjoy an active retirement. Increases in life expectancy and a stronger focus on a healthy, energetic lifestyle will see this cohort engaged in a range of pursuits that might include part time work, voluntary work and participation in a myriad of activities and adventures.

An active life comes with implied costs at a time when the risk-return landscape becomes more complex. A greater focus on using accumulated wealth to sustain a level of income throughout retirement requires careful planning, a meticulous focus on asset allocation to both sustain capital and generate income, as well as risk management.

Of course, not all goes to plan. In 2022-23, the average age at retirement (of all retirees) was 56.9 years, yet the average age people intended to retire was 65.4 years^[1]. Why the difference? Illness, accident, losing a job at an age where finding another is increasingly difficult. This emphasises the importance of retirement planning – and that planning early is critical. Not only does it allow for the unexpected, it can enable clients to better plan for, and manage, the risks their retirement savings may face over the coming years.

Consider the following:

• almost 10% of Australians have retired poor^[2] – although each subsequent generation will have more money in super, for many baby boomers compulsory super was introduced partway through their working lives. As such, the median balance is around $205,000 (less for women)^[3]
• financial challenges for retirees are increasing alongside the need to fund more years in retirement
• retirees find it extremely difficult to manage savings over an unknown period of time as factors such as sequencing risk, market volatility and inflation introduce extreme uncertainty into long term planning
• increased uncertainty due to the geopolitical environment and US economic policy will most likely impact financial markets over the coming years.

It is critical to educate clients about potential risks before they retire. Each client should understand the potential risks they may face and the implications for both their retirement income and lifestyle.

Risks in retirement

Certain risks come with a level of control for most individuals. These include the timing of retirement, the amount saved and the rate of withdrawal once retired. Both you and your client can influence these factors. However, unexpected events may lead to early retirement, while unforeseen financial challenges can limit the funds available.

On the other hand, some risks are beyond control. These ‘uncontrollable’ risks are often interconnected and can have long-term effects on your client. Whether individually or collectively, they may impact investment risk tolerance, force reduced spending or require difficult lifestyle adjustments.

Controllable risks

Certain retirement risks are often labelled ‘controllable,’ although that may not always be the case. Unforeseen events can disrupt even the most carefully laid plans, making personal insurance a crucial safety net – especially for those forced into early retirement due to illness or an accident.

Consider retirement timing. Ideally, your client will choose their preferred retirement age and, with your guidance, transition to retirement accordingly. However, as outlined earlier in this article, many Australians retired earlier than expected: health issues, accidents, caregiving responsibilities, job loss, or business failure can all precipitate an earlier than expected retirement event.

An unplanned transition into retirement can create uncertainty, leaving individuals feeling anxious and financially unprepared. Beyond the emotional toll, unexpected early retirement can upend financial plans – eliminating a stable salary and leaving retirees vulnerable to market fluctuations. This underscores the importance of early retirement planning, as unforeseen circumstances may accelerate a client’s retirement timeline and leave them less equipped for long-term financial security.

Another so-called controllable risk is the amount of retirement savings, with increased contributions often seen as a way to mitigate the risk of running out of funds. While a sound strategy in principle, increasing contributions is not always feasible. Increasingly, older Australians are retiring with mortgage debt or using their savings to support family members (the bank of mum and dad). Additionally, the same factors that influence retirement timing – such as job loss or health issues – can also limit a person’s ability to contribute more. Despite these challenges, retirement planning should prioritise strategies to boost savings as early as possible, as even small increases in contributions can yield long-term benefits.

A third factor often considered controllable is the withdrawal rate. The faster retirement savings are drawn down, the sooner they may be depleted. This can impact a client’s ability to meet essential needs, maintain their lifestyle and safeguard their overall well-being. However, mandatory minimum drawdown requirements must be met, and personal circumstances can shift over time, affecting both retirement strategies and the longevity of savings.

Uncontrollable risks

Given the uncertainty of life and death, it’s impossible to work out precisely how much retirees can afford to draw down each year. Instead, many retirees face a tough decision: should they live more frugally, or risk running out of money?

The additional uncertainty around future investment returns throws a further complication into the mix.

Australians cannot plan their retirement based on recent or contemporary market movements as they need to account for unknowable future market returns. The current global environment has a plethora of challenges for markets – the impacts of US tariffs on markets, inflation and rates; geopolitical forces and the impacts on financial markets; political changes worldwide and how changing policies could impact the economic environment both within individual nations and worldwide.

As highlighted by the Retirement Income Review, Australian retirees are dangerously exposed to longevity risk – the risk of outliving their savings. This risk, the ‘fear of running out’ (FORO) is one that’s particularly anxiety provoking for many older Australians. In turn, longevity risk – or the longevity of retirement savings – is affected by several other key risks, namely:

Sequencing risk

The market conditions that prevail in the seven to ten years before and after retirement can make an enormous difference to how long their funds last. Those crucial years are often called ‘the retirement risk zone’ (see figure one). It is during this period that a severe market downturn could be most detrimental.

If a client is fortunate enough to retire in a period of positive markets, their income drawdowns will be fully or partially offset by investment returns. This is an ideal scenario.

However, if the ‘retirement risk zone’ coincides with a period of negative returns, retirees may start eating into their savings at an accelerated rate, potentially emptying the nest egg^[4]. Market shocks during the vulnerable period will leave Australian retirees with less time to recover, while falling asset prices and drawdowns for income can magnify the scale of capital losses. Ultimately, any losses will diminish the total value of the remaining assets.

Retirees have no control over the sequence of returns; in other words, on the order of years with positive or negative returns. In a perfect world, Australians would retire only during periods of reduced volatility when their investment outcomes can be planned for with a greater deal of certainty.

Market risk

The GFC, which saw the ASX 200 lose roughly 54 percent of its value between 2007 and 2009, scared many Australian retirees. Research by National Seniors Australia carried out a decade after the crisis found 72 percent of retirees were afraid they would face a similar crash in their lifetime^[5].

More than half (59 percent) said they would not be able to tolerate a crash of that magnitude. In 2020, many came close to experiencing a GFC-like event. As the Covid-19 pandemic spread across the globe, markets reacted violently with the ASX 200 index losing 35 percent of its value between 20 February and 23 March.^[6] Markets have since bounced back to record new highs; however, the risk of exogenous shock is heightened in the current geopolitical environment.

The timing, as well as the size, of a crash can have dramatic consequences for the retired. As modelled in figure two, the prevailing market conditions at the time of, and after retirement can determine how long a retiree’s capital could last when investing in a balanced portfolio. It was chance that dealt 1982’s retirees buoyant markets, and chance that presented 1929’s retirees with a market crash and rapid capital depletion.

Because retirees can’t align their retirement date with ideal market conditions, the decision (forced or not) to leave work can be a big gamble, particularly without the right mix of strategies and products. Unfortunately, chance can sometimes have a much greater impact on retirement outcomes than good planning.

A significant capital loss requires a significant gain to get back to the same point. As illustrated in figure three, there is a nonlinear relationship between gains and losses; as the loss grows, the gain required to restore the loss escalates.

Clients in the accumulation phase generally have the advantage of time to recover losses, as well as the opportunity to invest more during market downturns, taking advantage of lower priced assets. Unfortunately, a retiree in decumulation phase does not usually have this opportunity.

Inflation risk

Inflation risk has been making headlines and been top of mind for several years now. Although it’s largely ‘under control’ in most markets, some of the political decisions being made overseas risk its resurgence. For example, the tariffs being imposed by President Trump will be inflationary. Even if that inflationary affect is confined to the United States, the impact on its financial markets can have worldwide effects.

The compounding impact of inflation over time can erode retirement savings. Figure four uses the example of a retiree with $500,000. An annual inflation rate of five percent would result in their savings running out 10 years sooner than if inflation stayed at two percent. Concerns about inflation and rising costs are top of mind for many pre-retirees; for those already living on a fixed retirement income, the impact is likely to be much greater.

Higher inflation reduces purchasing power and introduces the risk that a retiree’s spending needs in the future will be higher than originally planned. This, in turn, may exacerbate the fear of running out of money and increase loss aversion. A 2024 Investment Trends report cited their research found retirement confidence had dropped to a 10-year low last year, with 47 percent of pre-retirees feeling unprepared for retirement as cost of living pressure continues to mount^[7].

These concerns can also lead to an overly conservative mindset toward both investing and spending.

Behavioural Risk

Sometimes referred to as ‘loss aversion risk’, behavioural risk can impact how a retiree invests, how much income they draw and what sort of lifestyle they adopt. A range of behavioural studies have illustrated traits and biases that can impede your clients from making reasonable decisions about their retirement savings.

These biases might stem from others’ experiences, the fear of outliving their savings or the fear of losing capital. An earlier research report from Investment Trends^[8] identified three retirement fears that remain pertinent in the current environment.

While loss aversion is a major factor influencing investor behaviour, particularly in retirement when it’s difficult to recoup losses, understanding other biases and fears that may negatively impact your clients’ decision making is essential to retirement planning.

Conservatism Risk

Linked to behavioural risk, being hyper-conservative can influence both investment and spending decisions in retirement. Some retirees adopt an overly defensive stance to investments, shifting substantial portions of their portfolios into cash and term deposits. This cautious approach can pose a significant behavioural risk and increase the likelihood of panic-selling growth assets during market downturns.

While many retirees may be willing to reduce the probability of negative returns at the expense of upside potential, they also need to understand the potential long-term ramifications of reducing exposure to growth assets.

Expect the unexpected

There is always the risk of unexpected expenses. As Cyclone Alfred bears down on south-east Queensland, retirees in its path may be spending money on protecting their home and other assets. In the aftermath, they may need home repairs they would not have anticipated a week or two ago. Others face unforeseen health-related expenses or the need to support children or grandchildren to experience economic hardship.

Divorce can also stretch retirement budgets in unexpected ways. Financial consequences include the potential for legal fees to eat into retirement savings, the need to split retirement savings, and the loss of being able to share expenses, which makes life more costly for single retirees.

Retirement risks are interconnected. Market volatility contributes to both market and sequencing risk, while inflation can trigger and exacerbate these challenges. Inflation also heightens longevity risk and influences retirees’ behaviour, making them more loss-averse or encouraging more frugal spending. While education can help clients navigate these risks, strategic portfolio construction also plays a key role in managing them – either partially or entirely.

Building a well-structured retirement portfolio is complex, as retirees require a balance of capital, income and the flexibility to adapt to changing circumstances. One effective strategy is to incorporate both capital protected and guaranteed income products. Capital protected products help mitigate market risk, preserve principal and provide a steady income source. Guaranteed income products offer a reliable income stream throughout retirement. By combining these elements, advisers can create diversified retirement portfolios that effectively balance risk and reward, ensuring greater financial security and peace of mind for retirees.

The financial services industry now has a significant opportunity to enhance retirement strategies in ways that could dramatically improve both the financial wellbeing and emotional health of retirees. Companies that develop tailored solutions – focused on flexible, guaranteed lifetime income while maintaining access to capital – will set the standard in shaping the future of retirement planning.

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Notes:
[1] ABS, Retirement and Retirement Intentions Australia, May 2024
[2] B Coates, T Chen, ‘Why Australia’s old-age poverty rates are far lower than you might think’, Grattan Institute, 10 April 2019
[3] ASFA, An update on superannuation account balances, September 2024
[4] Allianz Retire+, ‘Talking about sequencing risk’, February 2019
[5] National Seniors Australia, ‘Once bitten twice shy: GFC concerns linger for Australian seniors’, July 2018
[6] C Johnson, K Lane, N McClure, ‘Australian securities markets through the COVID-19 pandemic’, Reserve Bank of Australia, 17 March 2022
[7] Investment Trends, 2024 Retirement Income Report, October 2024
[8] Investment Trends, 2022 Retirement Income Report, October 2022

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With certainty of income and ready access to capital, retirees will have the confidence to relish their post-work years.

As an increasing number of Australians face retirement, there are mixed emotions. Will it be a time to realise dreams and accomplish long-held plans? How can I be certain that my retirement savings will last the distance? What comprises do I need to make to allow for future needs and contingencies?

Even with the best retirement plan, it can be challenging for clients to plan for the future when there’s the uncertainty of not knowing for how long they will need a regular income, or the unplanned health or aged care needs that might arise. Add to that concerns around the cost of living today and in the future, and it’s not surprising that so many Australians are not financially confident or certain about retirement.

When it comes to managing finances – both pre- and post-retirement – confidence is an important factor in decision-making. Why? Because it helps individuals navigate through life’s complexities and make good decisions.

Are Australians confident about retirement?

Recent research into making retirements more epic^[1] reinforces the dichotomy between two groups of Australians. Some are well prepared, confident, happy to spend their money on the retirement lifestyle they worked so hard to earn. Others are less certain, not sure if their money will last, if they’ll cope with the rising cost of living, what the future might hold.

Confidence in retirement is good for the individual, good for their community and good for the economy; rather than living frugally, confident retirees will spend in their community, support business and live the retirement lifestyle they’ve looked forward to. Anxiety about finances can have a detrimental impact on physical and mental health and often lead to unwanted changes to lifestyle to rein in spending.

The respondents to the above-mentioned research are, on the whole, reasonably confident that their retirement savings will fund a comfortable retirement lifestyle; however, only 24 percent are ‘absolutely’ confident. More than 50 percent think they ‘probably’ have sufficient savings for a comfortable retirement, although that doesn’t suggest confidence or certainty. The remaining 20 percent are uncertain or sure they won’t have sufficient savings to fund a comfortable retirement (figure one).

While the notion of comfortable will vary from one person to another, taking guidance from ASFA’s retirement standards, the lifestyle elements of a modest retirement are unlikely to meet the aspirations of most retirees.

Figures two and three measure the confidence of singles (figure two) and couples (figure three) about retirement funding for whole of life – what’s the risk that they will outlive their savings? The majority of singles and couples are ‘somewhat’ confident their retirement savings will last the distance, while 19 percent of singles and seven percent of couples have no confidence in their savings. This highlights an important factor – while many costs are similar for a couple or a single (running a home, a car) – single people typically have lower retirement savings. It not surprising then that more couples are ‘very confident’ about their retirement funding lasting their whole life (27 percent versus 20 percent for singles).

The rising cost of living has been top of mind for many people worldwide. Approximately four out of five respondents are unsure or not confident about being able to afford the rising cost of living throughout their retirement (figure four). A lack of confidence about the longevity of retirement savings and the ability of those savings to cover anticipated cost increases can have negative repercussions. Uncertainty can create anxiety about finances and increase the propensity to live a frugal lifestyle in a bid to ‘self-insure’ against meeting future needs.

To ensure financial confidence in retirement, clients need the certainty that arises from secure income streams and the knowledge to navigate retirement systems and achievable retirement goals.

Education

Informed people are usually confident people. There’s a lot to know about the retirement system and navigating it can be a challenge.

Throughout the accumulation phase, clients may have been less interested in superannuation; the combination of employer contributions and salary sacrifice (for some) invested for decades often result in a satisfactory outcome with minimal input.

At retirement, everything changes. There’s a greater need to understand how superannuation works and how it will provide retirement income.

There’s a need for clients to understand retirement income products both within and outside their super fund. There is also the need to understand how the client’s assets, income and superannuation will interact with the Age Pension and other government entitlements.

Once a client has a clearer understanding of how the retirement system can support them, the conversation can move on to specific retirement income strategies; from where each individual will get their retirement income and how they expect to spend it.

Addressing longevity is an important aspect of retirement planning. As individuals age, their expenses and financial needs evolve, sometimes significantly. Lifestyle expenses such as travel and hobbies may be replaced by care and medical costs, and often the expense of a transition to residential aged care.

One of the most common concerns among Australians is the risk of outliving their retirement savings. To provide your clients with confidence and financial security, it is vital to make longevity a central element of their retirement strategy and introduce it early in client discussions. By encouraging clients to envision a long and fulfilling retirement, you can turn the challenge of longevity into a motivating factor for more comprehensive and thoughtful retirement planning.

Certainty and financial confidence

Retirees need certainty of income and access to capital to be financially confident. This ensures they can savour their retirement years with financial security and peace of mind, enabling them to flourish in retirement and enjoy this next well-earned phase of life.

However, the current range of super-based retirement income strategies is limited. The options generally don’t fully address the financial confidence retirees need to enjoy a comfortable lifestyle.

At one end of the spectrum, Account Based Pensions alone provide flexibility, but can leave retirees shouldering significant investment risk, especially when used in isolation. At the other end, traditional lifetime Annuities are poorly understood and generally perceived as an expensive and inflexible solution. The Age Pension barely provides enough income to sustain a modest retirement lifestyle by ASFA standards.

Traditional retirement income products involve tough trade-offs between income certainty and flexibility and are often subject to unpalatable limits as to how one can invest, withdraw or use their money. Many of the available products and strategies are perceived as rigid and difficult to execute, often pushing retirees to adopt sub-optimal self-insurance actions such as budgeting and lifestyle limitations to eke out their savings.

Account Based Pensions

Most Australian retirees manage their income needs via traditional asset allocation strategies within an Account Based Pension (ABP). While a common choice – and one that generally works well in a bull market – they leave retirees exposed to multiple risks. Fear and uncertainty come to the fore with concerns about fluctuating, market-linked account balances. This uncertainty may see retirees forego holidays, family visits and other comforts to cushion the impact of future, unknown, investment downturns or unexpected personal costs^[2].

An ABP is a regular income stream bought with money from a super fund upon retirement or as part of a transition to retirement strategy. It offers regular, flexible and tax-effective income from superannuation and can be accessed when the individual reaches ‘preservation age’. It lasts as long as their super money does and importantly, it is not a guaranteed income for life.

With an ABP, retirees (and their adviser) typically get to choose:

• How much of their super balance they wish to transfer to the ‘pension phase’ (subject to balance transfer cap rules)
• The size and frequency of income payments (subject to government minimum drawdown requirements)
• How the capital is invested (through the super fund)

Traditional Annuities

A traditional Annuity is a form of retirement income that provides a guaranteed income for fixed period, which can include the term of a retiree’s life. An Annuity can be purchased from a super fund or life insurance company using superannuation or other savings.

And, while an Annuity is less flexible than a typical ABP, it does provide income certainty for the selected term, which could be:

• a fixed number of years
• the client’s average life expectancy
• the client’s lifetime.

While an Annuity can in some instances provide a lifetime income, the product’s drawbacks and complexities have meant a smaller proportion of retirees have elected this option.

 Age Pension

Designed as a safety net, the Age Pension is the most common income support payment available for people aged 65 and over. On 31 March 2023, around 2.6 million Australians received a full or part Age Pension^[3].

Administered by Services Australia, the Age Pension is available to retired (or semi-retired) Australians aged 67 plus. It involves a substantial application process and is subject to an assets test (which excludes the family home) and an income test. The latter includes any income received from part time work, as well as retirement income received from an ABP or annuity, although some annuities receive favourable treatment.

As a safety net, the Age Pension is fit for purpose. As a sole retirement income stream, it makes for a challenging retirement and would not instil the confidence retirees need to enjoy a comfortable lifestyle.

Pros and cons

 Next generation retirement income products

The 2020 Retirement Income Review found Australian retirees want longevity protection and guaranteed lifetime income products to protect their quality of life^[4]. The resulting Retirement Income Covenant requires superannuation funds to deliver member retirement solutions (decumulation) in addition to the historical focus on accumulating assets, inevitably spurring demand and supply.

More recent research highlighted by the Review showed that retirees were interested in incorporating guaranteed lifetime income products into their retirement strategies but found it difficult to select a suitable product.

The ongoing body of evidence indicates that Australians will need the support of trusted financial advisers and institutions to review and implement an appropriate retirement income strategy as new solutions come online.

Next generation of retirement products will improve further on earlier efforts with outcome oriented solutions designed around core features that include:

Over time, it’s expected that guaranteed lifetime incomes will form the foundation of future retirement strategies. Retirees and financial advisers will also have to consider questions when selecting lifetime income products with due diligence likely to cover issues such as:

• the product provider’s legal obligation and ability to honour their long-term commitments
• whether the income stream is guaranteed
• how easily capital can be accessed should personal circumstances change
• the regulatory regime that covers these products
• the product’s underlying investment structure.

Australia’s shifting demographics toward an ‘older for longer’ population highlights the importance of retirement strategies that provide income certainty and the opportunity to access capital. Clients close to retirement are increasingly wary of the risks posed by longer life expectancies, market volatility and increases in the cost of living. And as this new wave of retirees – flush with ever-larger superannuation balances – rolls into the post-work phase, they need products and strategies that address their concerns.

Retirees need innovative solutions that provide for longevity without sacrificing financial flexibility; retirement strategies need to incorporate a more comprehensive suite of features including guaranteed lifetime income, market-linked returns, downside protection and the ability to make withdrawals.

With certainty of income and ready access to capital, retirees will have the confidence to relish their post-work years and be empowered to thrive in and embrace this well-deserved chapter of life.

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Notes:
[1] Allianz Retire+ and Epic Retirements, How do we make retirements more epic, August 2024
[2] L Lucas, ’Why do people spend the way they do in retirement? Findings from EBRI’s spending in retirement survey’, Employee Benefit Research Institute Issue Brief, 14 January 2021
[3] Income Support for Older Australians, Australian Institute of Health and Welfare, September 2023
[4] Australian Treasury, ‘Retirement Income Review: Final Report’, 20 November 2020

The post Financial confidence and certainty in retirement appeared first on AdviserVoice.

A retirement spending plan will differ during the stages of retirement.

Retirement is often seen as a time of relaxation, freedom and the opportunity to enjoy the fruits of a lifetime of hard work. However, without careful planning, the financial aspects of retirement can quickly become a source of anxiety. A crucial aspect that may often be overlooked is a comprehensive retirement spending plan.

Unlike during your clients’ working years when income is typically stable and predictable, retirement is a seismic shift. Not only does it require a change in mindset, but it brings a shift to living off savings, investments and a fixed income. This transition demands a clear strategy for managing expenses to ensure your clients’ funds last throughout their retirement years. A well-crafted spending plan not only helps your clients maintain their desired lifestyle, but also provides peace of mind by reducing longevity risk – or the risk of clients outliving their savings.

Are Australians prepared for retirement?

Most Australians spend years saving for retirement. They make plans that involve travel, hobbies, family time and more. Unfortunately for many, when the time comes to start spending the savings they have worked hard to build, there’s no spending plan, or strategy, in place. At this point, many readers may feel smug in the knowledge that their clients do have such a strategy ready to implement when the time is right. However, there are many prospective clients who don’t. Unfortunately, some of those may well have started spending. This does, however, provide an opportunity for advisers.

Recent research into making retirements more epic^[1] suggests a propensity to front load expenditure, with 67 percent of respondents expecting to have higher spending in early retirement (figure one).

This coincides with the ‘honeymoon period’, that first flush of retirement when a client savours their newfound freedom and spends time doing the things they love. It’s a period that can span six months, ten years…or more! As every client is unique, so is every retirement. Each client’s individual experience and circumstances will determine the length of their honeymoon period.

Given the propensity of Australian retirees to travel – incredibly, 71 percent of Australians prioritise spending their retirement savings on travel^[2] – it’s not surprising that so many expect to spend the bulk of their retirement savings in the earlier years of retirement. Further, 44 percent of respondents anticipate retirement spending that is higher than their basic needs (figure two). What does that mean for the remainder of retirement, a time when significant health and care costs often take centre stage?

When the data presented by figures one and two are examined collectively, it’s evident that fewer retirees are preparing for the later stages of retirement. This is emphasised in figure three, which shows that 73 percent of people have not planned or budgeted for health care or aged care support in their later years.

The honeymoon period often ends because of health or mobility issues; spending on travel or hobbies makes way for increased expenditure on health, care and related services. If the individual’s retirement spending plan has not accounted for this ‘back-loaded’ expenditure, there is a risk of outliving retirement savings and becoming reliant on the Age Pension.

At the other end of the spectrum, among those who save for the later stages of retirement, there can be the propensity to limit their expenditure. While on one hand it’s a positive that they are less likely to outlive their savings, it could mean those individuals are being overly frugal in retirement because they don’t have a spending plan and they’re ‘self-insuring’ against longevity risk. There needs to be a balance.

Retirement spending plan

A retirement spending plan provides a clear roadmap for managing finances throughout retirement; it manages clients’ savings to extend across as much of their retirement as possible. Without a well-structured plan, retirees risk depleting their funds too quickly or underspending due to fear of running out of money.

A spending plan takes into account fixed and discretionary costs, as well as an individual’s health and life expectancy, allowing retirees to make informed decisions about their lifestyle and financial commitments. It can also identify potential shortfalls early, providing an opportunity to adjust investments or spending habits to stay on track.

How much is enough?

Possibly one of the most asked questions – how much do I need to retire?

Every retirement is different, but it’s safe to expect that most of your clients want at least a comfortable retirement, as defined by ASFA. The organisation’s retirement standard^[3] is generally regarded as reasonable measure of the annual expenditure required to sustain a modest or comfortable retirement (figure four).

While the budget for the earlier stage/s of retirement is higher than for those aged around 85, it’s not a significant difference. This is a potential issue for those planning to front load their retirement spending.

Pre-retirement

There are a number of strategies your clients could consider pre-retirement to boost their retirement savings – and therefore the spending they can enjoy in the future.

The downsizer contribution

If clients are considering moving to a smaller or more retirement appropriate home before they retire, or even in early retirement, they can take advantage of the federal government’s downsizer contribution to boost their retirement savings.

Those clients aged 55 or older can contribute $300,000 (single) or $600,000 (couple) from the proceeds of the sale to their super fund. It’s treated as a non-concessional contribution and does not count toward the contribution cap – although it does count towards the transfer balance cap^[4].

There are eligibility requirements that include:

• the home must have been owned for 10 years or more
• the home is in Australia and is not a mobile home
• the proceeds from the sale of the home are either exempt or partially exempt from capital gains tax under the main residence exemption.

The client must make their downsizer contribution within 90 days of selling the home and can only do this once.

When once considers the ASFA standard suggests a total super balance of $690,000 (couple) or $595,000 (single) to achieve a comfortable retirement, a downsizer contribution can potentially make a significant difference to a client’s retirement lifestyle.

A transition to retirement strategy

Those clients who have reached their preservation age and are still working can use a transition to retirement (TTR) strategy to draw on their super while still working. This can be used as a ‘super booster’, with clients contributing more of their income to super via salary sacrifice.

A TTR strategy enables clients to top up their income with a regular ‘income’ from their super fund, thereby receiving income from two sources: their employer and their superannuation. At the same time, they continue to receive super guarantee contributions from their employer and can increase their personal contributions. This can be an effective way to grow a client’s superannuation balance.

For those clients aged 60 (or over), the pension income from super is tax free. Until your client retires or reaches age 65, the maximum income they may draw in any year is 10 percent of the account balance.

The increased income can also be used to discharge debt or otherwise prepare for retirement.

Preparing for retirement

With increased house prices – and the greater need for dependents to draw on the bank of mum and dad – an increasing number of Australians are taking a mortgage into retirement. Over 50 percent of homeowners aged 55 to 64 are still repaying a mortgage; this represents a 135 percent increase compared to 20 years ago^[5]. There’s no doubt mortgage repayments (and paying out other debt) would likely take a sizable chunk of a fixed retirement income. Discharging a mortgage using a lump sum from super has been a prevalent approach in the past…however consideration has to be given to larger mortgages and the effect on retirement income.

It’s also important for clients to consider what they might need (or wish) to try and achieve before they stop full time work: large home repairs or renovations to make the home ‘retirement ready’, a new car or a bucket list holiday. Using earned income to purchase large ticket items rather than a lump sum from super means a retirement income stream that’s larger and/or lasts longer.

The plan

Retirement brings change that will transform your clients’ spending habits and reshape their financial needs. Everyday expenses tied to their working life will generally decrease, while spending on leisure activities, hobbies and travel are more likely to increase. Ultimately, it comes down to how much each client has saved and whether those savings will be sufficient to meet their future needs.

Evaluating this requires strategic planning, foresight and a few key assumptions. Each client’s life expectancy, health, lifestyle choices – as well as the size and composition of savings – will shape their retirement spending plan.

Step one: Budget

The government’s MoneySmart website, along with many super funds, offer a range of calculators for clients to create a retirement budget. This is the first step to create the spending plan. It’s likely that the budget will change over time; fixed expenditures such as care is unlikely to figure in the early years of retirement. Likewise, car expenses and many discretionary costs are likely to diminish with age.

The budget needs to include fixed expenditure, such as:

• home costs – council rates, body corporate fees, insurance, repairs and maintenance
• utilities – water, electricity and gas
• car expenses – petrol, registration, insurance, repairs and maintenance
• communications – mobile and fixed line phones, internet
• health – insurance, medical appointments and pharmaceuticals
• care – in-home or aged care costs
• food – groceries and fresh foods.

The budget should also include discretionary items; some are necessities, but the quantum of expense has an element of choice, while others are purely elective. Such expenses include:

• clothing and footwear
• household appliances
• media – subscriptions to news, magazines or streaming services
• computer and software
• leisure activities – eating out, cinema, hobbies and more
• travel – domestic and international.

Longer-term costs

When creating a retirement budget, clients need to consider both the likely expenses in early and later retirement. One of the largest costs later in retirement is aged care, whether delivered in-home or in a residential aged care facility.

For clients who move into residential aged care, there is the one-off refundable accommodation deposit, which is generally a significant sum, as well as ongoing fees and charges. Having a plan and appropriate budget to support aged care needs can provide clients with a greater degree of choice and flexibility in selecting appropriate care.

Retirement income

Setting the budget looks at the expenditure your clients’ needs (fixed) and wants (discretionary). That then needs to be measured against the reality of the client’s anticipated level of retirement income. For without the requisite level of retirement income, the client cannot meet their needs.

There are several ways a client can withdraw from their retirement savings. Most Australian retirees manage their income needs via traditional asset allocation strategies within an Account Based Pension (ABP). While a common choice – and one that generally works well in a bull market – APBs can leave retirees exposed to multiple risks.

An ABP offers regular, flexible and tax-effective income from superannuation. Your clients can access an APB when they reach ‘preservation age’ and it lasts as long as their super money does. But…it does not provide guaranteed income for life.

On the upside, the capital providing the APB can be invested in growth assets that can increase the value of the investment and the longevity of the income stream. An APB is tax effective – tax is not paid on pension payments from age 60 and investment earnings are also tax free.

On the flipside, capital invested in growth assets may be subject to a range of risks arising from market volatility that might reduce the longevity of the income stream. ABP payments are linked to market performance; if drawing a fixed percentage of the balance, pension payments may increase or decrease in line with market movements.

ABP payments can be increased to compensate for market falls, even if the total value of the capital has fallen; however, this draws on a higher percentage of capital and increases the likelihood of consuming income producing assets more quickly.

Another option is the traditional annuity. While the product shares longevity risk (and in some cases investment risk) to an insurer, there are several reasons that have led to a low level of take up by retirees (and advisers). Some annuities have market linked income streams that may fluctuate in line with market movements and once income payments have started, there’s no opportunity to change the amount received. Money is locked away until the term of the annuity ends; retirees can be left unable to cover large or unexpected expenses, causing financial stress.

More recently, the emergence of ‘next generation’ retirement income products encapsulate the features needed by retired Australians. These needs include a guaranteed lifetime income, protected growth options and flexible access to capital. Such products represent a paradigm shift in retirement income. They offer simplicity, affordability, flexibility and growth potential in one comprehensive package. Through advancements in technology, innovative product design, and a renewed focus on user experience, these products have become more accessible and user friendly than ever before.

Next generation solutions have been designed to deliver increased confidence and certainty to retirement so the only indecision may be how to best enjoy this new phase of life. And, when creating a spending plan for clients, it can be so much more accurate when you and your client both understand exactly what their guaranteed retirement income will be throughout their retirement.

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Notes:
[1] Allianz Retire+ and Epic Retirements, How do we make retirements more epic, August 2024
[2] Equip Super research, 18 July 2024
[3] https://www.superannuation.asn.au/resources/retirement-standard/
[4] ATO, About Downsizer Contributions
[5] The Australian, If retirement beckons but you’re still paying off a mortgage, here’s what you can do, 16 August 2024, citing ABS data

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