We are starting quickly after the plum pudding to ensure 2014 is a very productive year. The post retirement phase needs very different investment strategies to the wealth accumulation stage. At the very least, there tends to be an income objective that is facilitated by growth asset versus a security objective that can be met with higher defensive asset allocations. Mass marketers of products like MySuper talk in terms of life cycling investments where they customise on a criteria like age. This automatic approach is useful for low engagement members and those with modest financial literacy. NetActuary provides analytic support to allow a far higher level of optimisation taking individual circumstances of retirement intentions, objectives, risk appetite, capacity to fund essential versus desired income etc into account.
We need to undertake risk mitigation without overly compromising returns. An equities emphasis increases the probability that the desired level of income will last the required payment duration but at the cost of increased downside risk. Cash (on the other hand) provides short term security but at a high cost down track. So, in essence, our challenge is to help retirees find the optimal trade off. This is going to require vastly more sophisticated analytical tools than those used by most advisers. We need a change away from simplistic return targets and risk profiling to evaluating the danger of not achieving the retirees multiple objectives of income, lump sums and estate goals. This objectives-based investing is also called “liability driven investing”.
There is now also a wider appreciation that major risk is not just the level of return achieved, but the sequence in which those returns fall. The needs for capital cashing at times of depressed asset values can shorten the duration at which desired income is sustainable by many years. The mass customisation solution is the “bucketing” approach. This involves typically a cash bucket for three years’ pension payments together with a longer term growth bucket. This is vastly too simplistic and too short. The NetActuary tools evaluate the holistic private cashflow requirements in excess of anticipated Age Pension entitlements and all cashflows to cover this. It takes into account dividends and structured capital releases from fixed term annuities. A period of up to 10 years is needed to provide a decent duration in which to replenish cashflow resources in up markets, without the worry of having to access growth assets in down markets.
Enough of the generalisations and background information! We need to focus on turning this into an action algorithm with dangers of not meeting objectives quantified. Various items will be loaded onto the website soon.
The NetActuary Team