New report proposes broader risk profiling and updated philosophies, to assist with retirement income planning

New report proposes broader risk profiling and updated philosophies, to assist with retirement income planning.

·        There is an opportunity for advisers’ “retirement income philosophies” to evolve and become mainstream

·        The different risks in retirement means the sources of income need to match the unique risk considerations and individual investor goals.

·        Retirement is not a set-and-forget phase. Advisers continue to play a key role in managing retirement risks.

Sydney, Australia (13 February 2025): Wider adoption of ‘retirement income philosophies and a new approach to risk profiling are just two of the ways advisers can continue to work towards delivering greater confidence for their growing number of clients in the retirement phase, according to a new report.

The report, Towards A Retirement Income Philosophy, draws on the personal experience of five financial advisers, who between them represent more than 1000 clients.

Towards a Retirement Income Philosophy provides an overview of the unique challenges and opportunities within retirement planning, emphasising the need for evolving philosophies to meet the demands of today’s environment.

“Retirement planning, with its inherent complexities and emotional challenges, demands advisers have specific expertise, empathy, and the right tools,” Allianz Australia Life Insurance CEO, Adrian Stewart said.

Retirement planning is already the most dominant advice sector, with research by Natixis Investment Managers, finding around 90% of Australian financial advisers are focused on servicing individuals between 50 and 60 years of age, namely pre-retirees.

It is also arguably the most intellectually demanding sector of financial advice, involving a complex and constantly changing regulatory overlay, a myriad of rules around superannuation, Centrelink, and aged care, a widening choice of product solutions, and the complexities of estate planning and intergenerational wealth transfer.

Adoption of Retirement Income Philosophy

The report outlines, a formal retirement income philosophy may help codify the practice beliefs and preferences around:

·        The methodologies to assess both the financial and emotional /behavioural risks faced in retirement

·        The preferred approach to addressing those risks

·        The strategies that align income needs with individual client risk profile, and

·        The product solutions used to implement those strategies.

Having examined why the risk methodologies commonly used in accumulation are inappropriate and problematic in decumulation scenarios, the paper also proposes a new approach which recognises the importance of income certainty.

This new approach includes new ways to more holistically assess a client’s preferred retirement income ‘style’, and the tools available to demonstrate the role new era retirement income stream product solutions can play to bring income strategies to life.

“If advisers are to continue to play their central role in facilitating an optimal retirement income system, then their ability to evolve and develop retirement income strategies efficiently, consistently, and transparently, is paramount,” Mr Stewart said.

“In the same way that investment and insurance philosophies are foundational resources for advisers and advice practices, driving more efficiency and consistency and quality outcomes for clients, the time is now right for the retirement income philosophy concept to become mainstream.”

He said retirement income philosophies should reflect the unique beliefs, methodologies, and business model of each individual practice.

Risk Profiling

The report considers several reasons why the techniques used to assess risk for accumulators may be inappropriate for decumulation scenarios, including:

·        They tend to concentrate more on attitude to risk more than risk capacity

·        The nature of questions in a decumulation scenario, coupled with a client’s overreaction to portfolio losses rather than the changes in the size and stability of income flows

·        They do not always reflect the fact that the separation seen between an accumulator and their portfolio no longer exists in decumulation, where those investments are now being accessed regularly, and that behavioural risks are therefore higher

·        If done infrequently, it can mean they may not reflect the dynamic nature of risk.

Collaborating with advisers to better understand why the risk methodologies commonly used in accumulation may be inappropriate and problematic in decumulation scenarios, this paper outlines a potential framework for a new approach which recognises the importance of income certainty.

As retiree numbers grow, financial advisers are at the epicentre of helping clients maximise their retirement incomes. In a landscape rich with complexity, innovation, and diverse strategies, it is perhaps more crucial than ever to work towards more formalized retirement income philosophies.

-ENDS-