Many of Australia’s 3.9 million1 retirees found themselves in an impossible situation in March 2020. Individuals who had worked hard all their life, paid taxes and raised families were forced to look on in horror as markets took a breath-taking tumble. A nest egg of superannuation savings, smashed.
Pre COVID-19 retirees reportedly had a greater sharemarket exposure than in years past because they needed higher yield from company dividends. With lingering financial scars from the 2008-09 Global Financial Crisis, many were already worried about how their savings would fare if another shock wave struck. Then it did.
Australia’s compulsory super system, lauded as one of the best in the world, has likely been successful in building those near or recently retired a sizeable sum of savings. However, unlike the dependable payments of yester-years defined benefit scheme, today’s retirees have few guarantees on their retirement income.
Instead, their retirement savings are subject to the uncertainty that comes with sharemarket investing. It’s a volatility rollercoaster with devastating market shocks; the ‘virtues’ of asset allocation and diversification no panacea when crises hit.
For the 1200 Australian’s who retire daily2, or for those who have found themselves forced into retirement due to the pandemic, this sharemarket plunge came at the worst possible time.
Retirees who perhaps have little scope to cut expenses or rebuild savings are forced to draw down on savings that had tumbled in value. Unlike accumulation where there is time to recover losses, it’s this toxic combination of bad timing and the need to draw on diminished savings that has retirees suffering the permanent and devastating effects of “sequencing risk”. Maybe the system we call Super isn’t so super after all.
COVID-19 dampening retirement dreams
To better understand the economic impact of COVID-19, in May, we conducted an independent, nationwide survey3 of over 1000 current and prospective Australian retirees. What became clear is the current climate has shaken retirees’ confidence about the quality of their retirement. Three in four retirees are not certain how long their money will last.
A staggering 82% felt their investments weren’t safe from an economic downturn and the research found they were responding to the changing economic conditions by reducing spending and taking fewer investment risks.
This was demonstrated in the extreme risk-off response that saw many an investor switching to cash. It’s low return and statistically increases the risk of running out of money in retirement, but there are no surprises. And for retirees managing their income, there is a great deal of certainty in no surprises.
We take for granted that people will insure their largest asset – their home. So why don’t they insure their next most valuable asset– super? Many retirees are acutely aware of just how crushing market volatility can be on their superannuation and it came as no surprise that around one in three prospective retirees stated they would consider an investment product that ‘insured them from market downturns’.
The fact is retirees desperately need growth assets to fund their increasing lifespan. It’s just the devastating sharemarket lows they could be spared. Overwhelmingly, retirees tell us they want certainty, stability and being able to sleep easy in regard to their savings.
How can you seek protection
One way to solve for this is to seek a low-cost protection mechanism on the sharemarket component of a portfolio. Similar strategies are offered broadly in markets like the United States, however, this is a new breed of retirement product in Australia, and is backed by a life company regulated by APRA.
These types of products can offer you a range of potential returns linked to either Australian or international sharemarkets, but unlike most sharemarket investments you can limit how much your investment can potentially fall in a year. For that, you will sacrifice some upside in sharemarket returns during a bull market, to limit any downside. But if the linked equity market falls, the investment will never fall below your chosen floor4– either 0%, -5% or -10% –a move that would have paid off during this crisis.
Take Eva who watched the value of her Australian shares fall sharply during February and March 2020 as the COVID-19 pandemic sparked a sharemarket drop.
She is concerned about ongoing sharemarket volatility sparking a further fall and as a retiree has limited capacity to withstand steep investment losses.
She wants to better protect her investment portfolio, so invests in a protection option and chooses the Australia shares option and the -5%6 protection Floor.
Eva knows upfront her return over one year will range from a maximum potential loss of 5% to a maximum potential return of 7.2%6 in an Australian shares option7.
Eva is willing to limit potential returns from her Australian share investment through her protection investment (if the S&P ASX Accumulation Index returns more than 7.2% over one year).
The most she can lose in one year is 5% and her maximum potential return is 7.2%6.
In investing in a retirement product that offers sharemarket protection, Eva limits the potential maximum loss and has greater investment certainty by knowing the range of returns over one year.
Eva is invested for a seven-year term7 and can draw an income stream from her investment8. She is also able to change her investment and protection option each year to suit her lifestyle needs or to match changing market conditions.
COVID-19 has exposed a gaping hole in addressing what I believe to be the biggest risk to retirement income – a lack of confidence and certainty.
It is my sincerest hope that the fallout from this crisis will take the wealth-management industry in a new direction in the coming years. It needs to be a direction that gives retirees easy access to affordable financial advice and many more retirement income products that specifically cater to their needs. But today, policy makers and industry stakeholders have much work to do to deliver the confidence and trust retirees crave. As things stand, 66% of the Australian retirees we surveyed stated they do not feel the super system will provide them with a dignified retirement. Without the assurance their investment won’t be crushed at the very point they need it most, why would they feel otherwise?
1 Australian Bureau of Statistics, ‘Retirement and Retirement Intentions, Australia, 2018-19
2Allianz Retire+ estimates based on Roy Morgan Press Release: Age of intending retirees increasing, March 2018
3Allianz Retire+ Survey, May 2020
4Subject to fees and taxes
5This a hypothetical example. Protection options are expressed as Caps with corresponding Floors. The Caps and Floors, and return on the Fixed Rate are expressed before the annual product fee and any applicable taxes.
6Illustrative examples only and based on Future Safe Caps and Fixed Rates – Effective from 01/07/2020- 31/07/2020. Expressed before fees and applicable taxes. Cap rates vary for Australian and international shares, and the fixed-rate option. The initial Cap rate is set at the policy commencement date and adjusts at the policy anniversary date to the effective Cap rate at that time.
7The S&P/ASX 200 Accumulation Index
8Withdrawals are subject to certain conditions and fees