Health looms as a super problem
HEALTH has been making headlines this week.
US President Barrack Obama shepherded his reform of the US health service through Congress with the political drama and brinkmanship reminiscent of the hit TV series West Wing.
On the local political front Prime Minister Kevin Rudd and Opposition Leader Tony Abbott have locked horns on the health debate in what will surely be one of the critical issues heading into the next election.
When it comes to retirement arguably there are two things that matter – financial security and the health to enjoy it. That accords with the two “big rocks” within the federal government’s budget – the rising cost of health care and pensions.
The good news is that someone retiring today at age 65 has a 50% chance of living longer than their life expectancy of around 85. Our health and lifestyle improvements are giving us a different kind of challenge – ensuring our money lasts for a much longer period.
A recent paper done by independent actuaries Rice Warner into longevity risk – the risk you will still be going strong but have exhausted your super – highlights the challenge for investors and for the superannuation industry.
Timing can sometimes be everything.
People retiring just as the global financial crisis unfolded through 2008 who had investment primarily in growth assets like shares copped a double whammy.
They saw their portfolio value plummet at the same time as they were stopping work and therefore losing the ability to rebuild the capital base.
A broadly-diversified, conservative asset allocation would have definitely helped take the sting out of the plunge in sharemarkets but it points to one of the contradictions that all new retirees have to confront.
On one hand at age 65 you have this marvelous leisure period stretching out in front of you where you can reasonably expect to live (and therefore invest) for another 15 to 20 years.
That sort of time horizon suggests a reasonable allocation to growth assets is sensible to get a balance of both growth and income from the portfolio.
But what the GFC has painfully reminded us of is the need to be able to ride out market events and not be forced to sell down assets at distressed prices – for example at the end of 2008 – to live on.
So Rice Warner is suggesting that retirees need two buckets of money – one for short-term liquidity to cover 12-18 months of living needs in retirement and the other for long-term growth.
To be fair this type of approach has been regularly used by financial planners in recent years. But what Rice Warner point out is that the superannuation industry is yet to really solve the issue of the right product for people in retirement.
The default fund in the accumulation phase may not be the right mix for you once you have stopped work and have begun drawing down a pension.
This will hopefully be one issue addressed in some detail by the Cooper Review of our super system in its final report.
Longer term solutions designed with retirees in mind will help us start looking at longevity risk as a terrific problem to have.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia. To receive this column by email each week go to www.vanguard.com.au and register with smart investing.