Why retirement planning must be personal

Is there a typical investor? Even if two people are in the same industry, with a similar income, they won’t have the same investment goals. Their personal financial situations will be different, so it makes sense to personalise super investment.

Everyone’s circumstances are different. Consider a fund’s total membership – the ranges of age, net worth, income, contributions, time horizons and tolerances.

It’s hard to imagine that a default strategy will suit all of their needs, all of the time. Here are some examples:

The Age Pension
This differentiator is often forgotten about, but whether or not a person will qualify for the Age Pension makes a big difference to the investment of their super. This is because the Age Pension is a great substitute for a fixed income portfolio. It provides a regular, inflation-adjusting income – currently just under $970 a fortnight for a single and almost $1460 for a couple (including supplements).

When you convert the Age Pension payable throughout a person’s retirement to a lump sum present value, you get a value in excess of $600,000 for an individual and $900,000 for a couple. That’s a very large, secure investment.

Let’s look at two people’s circumstances – Jan and Bob. Jan has $150,000 in super and is entitled to the full Age Pension; Bob also has $150,000 in super, but he also has share assets outside super that disqualify him from the Age Pension. In effect, Jan currently has a very heavily defensive position, while Bob’s investment is growth orientated. Because of this, their super investment strategies should be quite different.

Age differences
An obvious one – different ages mean different time horizons. Generally, a younger person has plenty of human capital (unearned income ahead of them) and little investment capital (a smaller super balance). Conversely, a person nearing retirement has little future earning capacity, but should have already built a retirement nest egg.

So the younger person should be able to accept short-term volatility, with the expectation of growth over the longer term. The situation is different for the person nearing retirement. They’ll be drawing down on their investment shortly, so may not be able to risk exposing too much of their accumulated wealth to short or mid-term downturns.

Accumulation versus drawdown
As we’ve just mentioned, if a person is drawing down their super, they are going to ensure that a proportion of their investment is protected from short-term volatility. But when looking at accumulation versus drawdown, it’s not just the time frame to consider, but also the tax treatment.

In the pension phase, income and investment earnings are tax free and this warrants consideration when working out an appropriate investment strategy, particularly when the retiree may have other sources of income to consider.

Household situations
Every household is different, so super sits differently within the household investment portfolio. Whether you’re single or part of a couple, own your own home or are renting, whether you have a significant investment outside super or just one super account between two, whether you’ll be debt free when you retire, all impact the way in which super is managed and invested. And in terms of retirement planning, these factors will impact the decisions individuals might make about their super.

People have different goals
Another obvious one, but individuals’ objectives will differ, often depending on their retirement income expectations. Just as people’s incomes vary in their working life, so too will their retirement incomes and their expectations are generally set in relation to their career income.

Some people will have modest retirement income expectations just above the pension – which may be the income they’re used to. Others will have higher income expectations and may be willing to undertake a riskier strategy to gain a potential higher income.

Depending on the level of income a person is used to, their idea of what is required income versus what is desired income could vary significantly.

People will also have different objectives and expectations in relation to their life expectancy, or even the age at which they are prepared to start living entirely off the pension. Couples need to take into account both life expectancies when working out their retirement income goals.

People feel differently about risk
We’ve briefly touched on risk and the need for a person to take on a higher level of risk to chase a potentially higher income. Some people are comfortable to accept higher risk to chase the reward of a higher return, while others will be satisfied with a lower, more certain income.

Some people will always be happier taking more risk than others, but there is definitely a tendency towards conservatism, to obtain certainty of income once people approach and shift into the drawdown phase.

The answer is more than just a personalised investment strategy
The differentials above support the need for a personalised investment strategy. But for an optimal retirement income result, it is not just the investment strategy that must be tailored to fit the individual. Personalised communication and education throughout both the accumulation and retirement planning phases is equally important. A one-size-fits-all approach is unlikely to lift engagement in super or encourage members to take the actions that will help them retire with more.

Communications need to be relevant and appropriate – right message, right time. Any examples, forecasts or calculations must be relevant to the individual and show impacts and consequences for them. People need to know you’re talking to them.

For example, many people still assume that 10 per cent super contributions will be enough. Providing a member with a personalised retirement income forecast, which demonstrates the impact that their own contributions will make, is more likely to get attention and promote action than a general article about the deficiencies of the Superannuation Guarantee.

A comprehensive approach to personalisation makes sense to improve an individual’s retirement income and their understanding of the actions they need to take to achieve their retirement goals.

Jeremy Duffield is chair of Retirement Essentials, a leading provider of government entitlements help and retirement advice. This article was republished with approval.

Do you believe that general advice from your super fund is sufficient to give you a sound retirement strategy? Why not share your views in the comments section below?

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