“As a result of the GFC a real new risk has been identified, and that’s market risk. When you get to be in your mid-50s and going towards retirement, when you have a precipitous market drop … it’s hard to make up, it’s hard to have your retirement assets grow as quickly as possible because you’ve only got a very short duration of time to have those assets grow – as a result, that’s a risk you have to protect against.” Stout says guaranteed income products have been available before, but lacked a couple of the key characteristics of the latest generation, including, most notably, access to capital at any time during retirement. “Individuals really want income guarantees,” he says. “They want the ability to have a guaranteed income that they can’t outlive.
But on the other hand they do not want their assets totally taken out of their control to generate that income. In particular that’s a trait of baby boomers.” Stout says it’s now up to financial planners to figure out how to best use the products for their clients. “It’s not that an individual should put all their assets in a product such as this, but if you can use products such as this in your overall planning, to take a portion of your assets, to be able to guarantee a monthly cheque to you, it gives you more security in retirement – and more and more folks will look to do that,” he says. “As you live longer you are going to need elements of growth assets in your inancial plan, but a portion of your assets put away in one of these structures gives the individual protection against outliving their assets.” This tim e it ’s diff erent The environment that exists for people retiring today, or in the “critical zone” are largely unparalleled.
As a corollary, opportunities for inventive and innovative product solutions are high. AXA says that the last big market crash, in 1987, had nowhere near the same impact on retirees as the GFC has had – and will have. In 1987, AXA says, the dominant retirement income product was the guaranteed annuity. A greater number of people were members of defined benefit funds, so a market crash was in some ways irrelevant to them. There was a much greater acceptance of the fact that in retirement an individual’s sole source of income would be the Aged Pension. And most individuals had minimal sharemarket exposure anyway. Fast-forward 20-something years, and the landscape has changed significantly. The dominant retirement income product is the allocated pension. Most people are members of defined contribution funds. The Superannuation Guarantee means many more people have superannuation than two decades ago, and many more investors bear the full impact of sharemarket movementsboth up and down. There are products available that offer guaranteed income for life, but they have one significant drawback: if a retiree buys such a product and dies, the issuer keeps the remaining capital.