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The Challenge of a Sustainable Retirement

This article explores the challenges faced by financial advisers in the current retirement landscape, including fewer clients seeking advice, investor reluctance to move out of cash, and the need to diversify income streams. It also discusses the changing demographics of retirees and the importance of planning for a longer retirement.

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The Challenge of a Sustainable Retirement

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  1. The Challenge of a Sustainable Retirement Melanie Alpar Distribution Manager www.ing.com.au Capstone PD Day October 2009

  2. Low Investor Confidence Creates Challenges Advisers • Fewer clients seeing financial advisers • People delaying retirement • Investors reluctant to move out of cash Investors • Time spent comforting existing clients. Difficult obtaining new clients. • Diversifying your income stream • Smaller transaction sizes

  3. 20 40 60 80 Dependence Development Peak Income Lifestyle Departure • Kids • Schools • Sport • Mortgages • New households • Investment • Peak spending • Active retirement • Annuities • Assisted living • Health issues Peak investment in the third-quarter of the lifecycle 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 Source: Australian Bureau of Statistics • Average annual income per income-earner by single year in 2006

  4. Spending and investment peaked in the Australian market over the last 20 years … much tougher over the next 20 1950 2009 2050 160,000 140,000 140,000 Seachange, treechange, McMansions, property booms x 2, rising tax base 120,000 100,000 80,000 60,000 40,000 20,000 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: Australian Bureau of Statistics • Net growth in population (40-59) over 100 years in Australia

  5. Baby boomers push into retirement next decade 1950 2009 2050 140,000 120,000 120,000 New retirees will be less frugal, more demanding, consumerist and, frankly, difficult to manage … “grumpy” 100,000 80,000 60,000 40,000 20,000 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050 Source: Australian Bureau of Statistics • Net growth in population (60-79) over 100 years in Australia

  6. The Retirement Landscape is Changing Once it was simply the “superannuation system”. But with the baby-boomer bulge nearing the end of their truncated membership of the system, there’s a new emphasis and a name change. It’s becoming the “retirement income system”. Barrie Dunstan, Questions of income adequacy left to age, The Australian Financial Review. 13 May 2009. The biggest risk for retirees is outliving their retirement income, not the investment risk of down markets. John Collett, Retirement Endgame, The Sydney Morning Herald. 3 June 2009

  7. In 2011, the first Baby Boomers will turn 65 • They Control Wealth: 46% of household wealth and 60% of super assets. • Their Income Needs to Last Longer: For a couple age 65, a 50% chance one will live past 90 years old. • They Face Market Risk: In order to fund longer retirements, it is usually necessary to allocate to growth assets. • They Want Income Guarantees: 77% of investors age 45 and over would be interested in a product that guarantees income life. Sources: ABS 2005/06 Household Wealth and Wealth Distribution. Australian Bureau of Statistics population projections; 10 September 2008. Milliman retirement survey, November 2008.

  8. Life expectancy over the past century Expected length of life at birth, by sex, Australia, 1901-10 to 2004-06 Over the period 1901-2000, life expectancy at birth increased by 21.4 years for males and 23.3 years for females.

  9. Plan on living longer than the average How many Australians live to 100 years of age? Sources: http://www.royal.gov.uk/HMTheQueen/Queenandanniversarymessages/Birthdaymessages.aspx. Australian Bureau of Statistics population projections; 10 September 2008.

  10. Child Adolescence Adult Lifestyle Retired Old 2009 82 Child Teen Old Adult 1969 71 Child Adult Old 1929 63 0 10 20 30 40 50 60 70 80 90 Baby boomers headed for the ‘retirement cliff’ … who wants to work longer or live leaner? • Change in life expectancy over 80 years in Australia Source: United Nations Statistics Division

  11. How long will the income last? Data: $500,000 invested in a diversified, multi-sector balanced portfolio comprising 25% Australian shares, 25% International shares, 25% International bonds and 25% Australian bonds rebalanced annually, earning an average annual return of 8.0%,  Initial 5% drawdown in year one, adjusted by average annual inflation of 3% and 1.8% fees . Source: Wealth benchmarksTM

  12. Actual results will vary 60% ran out before the average. Which path will your retirement follow? Data: $500,000 invested in a diversified, multi-sector balanced portfolio comprising 25% Australian shares, 25% International shares, 25% International bonds and 25% Australian bonds rebalanced annually. Historic retirements commence in 1885 and every 2nd and 5th year thereafter until last commencing in 1985. Each portfolio funds an initial 5% drawdown in year one adjusted by the 3% historical average inflation thereafter. Inc 1.8% fees. Source: Wealth benchmarksTM

  13. The sequence of returns matters 1982-2008 Both scenarios share an 8.85% average annual return, only the sequence has changed 2008-1982 Data: $500,000 invested in a diversified, multi-sector balanced portfolio comprising 25% Australian shares, 25% International shares, 25% International bonds and 25% Australian bonds rebalanced annually. Each portfolio funds an initial 5% drawdown in year one adjusted by a 3% inflation rate thereafter. Inc 1.8% fees. 2008-1982 simply reverses the order of returns, 2008 is year 1, 2007 is year 2 and so on until 1982. Source: Wealth benchmarksTM

  14. The sequence of returns matters The returns in the early years are critical Data: $500,000 invested in a diversified, multi-sector balanced portfolio comprising 25% Australian shares, 25% International shares, 25% International bonds and 25% Australian bonds rebalanced annually. Each portfolio funds an initial 5% drawdown in year one adjusted by a 3% inflation rate thereafter. Inc 1.8% fees. 2008-1982 simply reverses the order of returns, 2008 is year 1, 2007 is year 2 and so on until 1982. Source: Wealth benchmarksTM

  15. The sequence of returns matters – The Maths Positive Return Early $100,000 +10% $100,000 X 1.10 - $10,000 = $100,000 +10% $100,000 X 1.10 - $10,000 = $100,000 -10% $100,000 X .9 - $10,000 = $80,000 Negative Return Early $100,000 -10% $100,000 X .9 - $10,000 = $80,000 +10% $80,000 X 1.10 - $10,000 = $78,000 +10% $78,000 X 1.10 - $10,000 = $75,800

  16. Recovering from market declines is more difficult when you are taking income How much would it take to recover? 10% -25% 25% 33% 40% if taking 5% income Your future. Made easier.SM

  17. Drawing fixed %-of-balance makes for unreliable real spending Annual $ spending if draw/spend 5% of each year’s balance Target $25k For about 2/3rds of these 30 year retirements, a lower standard of living is forced to make money last. Inflation adjusted retirement spending through years of retirement if each year 5% of the investment balance is drawn/spent (for 50/50 equity/bond portfolios, 1.8% fees/taxes and for retirements beginning in 1905, 1910 and every 5th year thereafter last starting in 1975).

  18. The Challenge: Inflation Risk 1980: $3,698 How much would you pay today? Over $20,000

  19. $27,454 $57,483 The Challenge: Inflation Risk Today’s expenses Expenses in 25 Years 3% Annual Inflation The expenses of a retired couple seeking a modest retirement lifestyle - $27,454 pa (source Westpac / Association of Superannuation Funds of Australia (ASFA) Retirement Standard research report 2008). All other numbers were calculated based on a hypothetical 3% rate of inflation (historical average from 1885 through 2008) to show the effects over time; actual rates may be more or less.

  20. The Government’s response to longevity risk • The Government is Australia’s main provider of longevity insurance through the Age Pension • Recent media speculation around a proposal to allow retirees to “purchase” a non-means tested Age Pension from the Government • No official comment from Government • Longevity recommendations from the May 2009 Henry review report - The retirement income system: Report on strategic issues: • Recognised trends in Australian’s longevity • Will develop proposals relating to longevity insurance and consider: • If mandatory or voluntary; • Guaranteed or non-guaranteed income; and • Whether provided by the public or private sector

  21. Sustainability of Age Pension payments • The Harmer Pension Review Report • Issued February 2009 • Recommendations around sustainability include: • Scope for the means test to be tightened • Already legislated • Deeming to be applied to account based pensions • No proposed change • Increase Age Pension age to 67 • Effective 1 July 2023 • Affects all clients currently under age 57

  22. Implications for advice and product designs • Advice • Manage clients expectations • Be careful of relying on averages • Address market and longevity risk in your retirement income planning • Product Design • Longevity protection • Equity exposure • Access to capital

  23. Existing Products do not Offer Longevity Protection and Access to Capital Guaranteed Lifetime Withdrawal Benefits Guaranteed Minimum Accumulation Benefit Allocated Pensions Lifetime annuities Capital Protected*   Guaranteed Lifetime Income   Capital Protection    Exposure to Markets      Access to Capital * ING Protected Growth provides daily liquidity and bank guarantee whereas most providers products lock investors in for the term of the protection

  24. Active retirees • Annuities • Succession planning • High yield products • Young adults • Superannuation • Share portfolio • Kids • College fund • Student banking Expect a shift in demand from investment products to annuities over the next decade • Mature adults • Share portfolio • Investment property • Financial planning • Superannuation 500,000 400,000 Absolute Growth 1997-07 Absolute Growth 2007-17 300,000 200,000 100,000 0 Source: ABS Historical Population Statistics, 2006, Department of Health and Ageing Population Projections, 2007 0-4 5-9 10-14 15-19 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+ -100,000 • Net change in Australian population by 5-year age group over 10 years to 2007 and 10 years to 2017

  25. $1.1 Trillion in U.S. Variable Annuity Sales since 2000 The U.S. market, with similar demographics and retirement challenges, has seen strong demand for guaranteed lifetime income products. Current Breakdown 86%Guaranteed Lifetime Income 8%Guaranteed Income for a Term 5%Guaranteed Accumulation Source: LIMRA Guaranteed Living Benefit Election Tracking Survey, Third Quarter 2008

  26. What if you could guarantee your clients income ? Balance down 25% by end of 2008 1/1/07 $300,000 balance 5% income $15,000 31/12/08 $225,000 balance 5% income$11,250 Which income would your clients prefer?

  27. Certainty Control • Income for life. • Income will not decrease due to market declines. • Income has the potential to grow in a strong market. • Access to account balance • Allocate between ING MoneyForLife investment funds and the full menu of OneAnswer funds.* Confidence • Retirement on the investor’s terms. • Life decisions based on personal goals not market cycles. ING MoneyForLife Guaranteed retirement income. Guaranteed for life. Produces happy clients that are not dependant on market performance; leading to client retention, more referrals and business growth. Your future. Made easier.SM *Only the 3 ING MoneyForLife funds come with the income guarantee.

  28. Disclaimer The information is current as at 30 September 2009 and is subject to change. The issuer of this presentation is ING Custodians Pty Limited (ABN 12 008 508 496, AFSL 238346, RSE L0000673) (“INGC”). The information provided in this presentation is for illustrative purposes only and does not take in account any persons personal circumstance, needs or financial objectives. Whilst all reasonable steps have been taken, INGC does not warrant the accuracy of the information and accepts no liability any loss incurred in reliance of information in this presentation. Past performance is no guarantee of future performance and the return of an investors capital is not guarantee. Before making any investment decision investors must read the relevant Product Disclosure Statement and consult with a financial adviser.

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