Demystifying Drawdowns for Retirees · Life Expectancy Decile ( 1 to 10 , i.e. shortest to longest;...
Transcript of Demystifying Drawdowns for Retirees · Life Expectancy Decile ( 1 to 10 , i.e. shortest to longest;...
Demystifying Drawdowns for Retirees
Diane Somerville & John De Ravin
© Deloitte Consulting Pty Ltd, John De Ravin
This presentation has been prepared for the Actuaries Institute 2018 Financial Services Forum.
The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the
Institute and the Council is not responsible for those opinions.
Agenda
• Background
• Core motivations and needs in retirement
• Guidance around spending
• NZ Retirement Income Interest Group paper
• General considerations
• Criteria for drawdowns
• An idea
Background
• Objective of super is to provide income in retirement
• But Australia is a lump sum, defined contribution environment
• ABPs dominate retirement products
– In due course CIPRs/MyRetirement will become more important (budget covenant) & address part of the issue
• Retirees may not be financially literate yet only a minority seek advice
– How should a retiree invest his or her ABP?
– How much can the retiree(s) afford to spend?
– SIS minimum provides some guidance – but a blunt tool
• How can trustees support decisions about drawdown?
A growing need for retirement solutions
1.00 0.80 0.60 0.40 0.20 0.00 0.20 0.40 0.60 0.80 1.00
Population (Millions)
2012
Male Female
1.00 0.80 0.60 0.40 0.20 0.00 0.20 0.40 0.60 0.80 1.00
Age00-0405-0910-1415-1920-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-8080-8485-8990-9495-99
Population (Millions)
2032
Male
Female
Source: ABS Population Projections – Series B
Old-age dependency ratio will almost double
in the next 35 years
Source: OECD ‘Pensions at a Glance 2017’
Figure 1.1. The old-age dependency ratio will almost double in the next 35 years on average
Number of people older than 65 years per 100 people of working age (20-64), 1975-2050
0
10
20
30
40
50
60
70
80
90
2015 1975 2050
Expected years in retirement (2016)
Source: OECD ‘Pensions at a Glance 2017’
France
Belgium
Italy
Greece
Austria
Spain
Poland
Canada
Australia
Netherlands
Switzerland
United Kingdom
Germany
OECD
Denmark
Norway
Sweden
Japan
United States
New Zealand
Iceland
Chile
Note: Effective retirement age shown is for five year period 2011-16. Pensionable age is shown for 2016.
Panel A. Expected years, women, 2016 Panel B. Expected years, men, 2016
Source: OECD estimates based on the results of national labour force surveys and the European Union Labour Force Survey. Life expectancy estimates are calculated from United Nations Population Prospects: 2017 Revision.
60.0
61.3
62.1
62.0
62.0
62.2
62.6
65.9
65.2
63.5
66.0
64.6
63.3
65.1
63.7
66.2
65.8
70.2
66.8
68.4
69.7
71.0
23.6
21.3
21.8
20.6
21.0
21.5
17.5
18.9
19.6
19.9
19.0
19.3
19.5
18.1
19.1
18.1
18.7
15.5
17.2
16.7
15.9
13.7
83.6
82.6
83.9
82.6
83.0
83.8
80.2
84.8
84.8
83.4
85.0
83.9
82.8
83.1
82.8
84.4
84.5
85.6
84.0
85.1
85.6
84.6
55 60 65 70 75 80 85 90
60.3
59.7
61.3
60.2
60.6
62.6
59.8
63.1
63.6
62.3
64.3
63.2
63.2
63.6
63.1
64.4
64.6
68.8
65.4
66.4
67.2
67.2
27.6
26.1
25.6
25.5
25.4
25.3
24.4
23.9
23.7
23.6
23.3
22.9
22.6
22.5
22.2
22.0
21.9
21.1
20.6
20.4
19.6
19.5
87.8
85.8
86.9
85.7
86.0
87.9
84.1
87.0
87.2
85.9
87.5
86.1
85.8
86.1
85.3
86.4
86.5
89.8
86.0
86.9
86.9
86.6
5560657075808590
Life expectancy at effective age of labour Years in retirement Effective age of force exit labour force exit
Effective age of Years in Life expectancy atlabour force exit retirement effective age of labour
force exit
A variety of drivers leading to changes in consumer
behaviour
Consumers
Trust (conduct)
Go direct
Self knowledge
Product needs
• What product will suit consumer
needs best?
• Retirement / Longevity/
Insurance
Big data
• Potential asymmetry of
information with the consumer
knowing much more than the
product provider (insurer or
fund)
• The “quantified self” = consumers can now
know much more about their own health
and prospects and this will only increase
• Technology adoption for self-
help, research and social media
connections
• Direct market grows for simpler
products
• What does this mean
for margins?
• Do consumers end up with
appropriate products and
coverage?
• Financial advice experiences
• Reputational risk will continue to
play a big role
A mixture of very different needs for different consumers
at different stages of retirement
“While we found that High Asset consumers
were more likely to be comfortable about
retirement than Low Asset consumers (68
percent versus 41 percent), many consumers
in both asset classes were worried about
retirement. More often than not, the level of retirement preparedness was found to be a stronger indicator of consumer attitudes and behavior than relative asset level.”
“Mining the Retirement Market”
Deloitte US
There are some common needs to consider
• Products and services that are designed to speak to core motivations create stickier experiences, are more stable in demand and require less customisation in delivery
Health Wealth Happiness Legacy• Do I have specific
illnesses or care requirements?
• What are my forecasted annual health costs?
• Am I active in preventative health management?
• Is aged care in my current plans?
• Are my retirement savings adequate?
• How dependent will I be on a pension?
• Have I optimised my investment portfolio?
• What role will my property/s play?
• Will I need money before my super is available?
• How do I want to spend my retirement?
• How do I explore new hobbies and experiences as I change life stages?
• Do I have dependents, parents or siblings I want to care for?
• What do I want to be remembered for?
• How do I connect with my community now that I am not working?
No ‘one size fits all’
• A range of sources for financial and other solutions
Drawdown “rules of thumb” from NZ1
1”Decumulation options in the NZ market: how rules of thumb can help”, Christine
Ormrod & Retirement Income Interest Group, November 2016.
Rule of Thumb Critique
6% rule: 6% of F(t) No recognition of asset allocation; no
recognition of age; volatile
4% rule: 4% of F(0)*CPI(t)/CPI(0) Stable but runs risk of running out of
funds OR significant under-spending
Fixed date rule: 1/(N-t) * F(t) Assets expire after N years; volatile
Life expectancy rule:
F(t)/e(x+t)
No recognition of interest earnings;
volatile
Considerations (situation of client)
• Client attitude to consider some reduction in spending as age
increases
• How much spending flexibility (wants vs needs)
• Drawdown rate not an issue for clients who live off real
investment return
• Time preferences of individuals: more spending now, or later
• Allow for demographic and financial circumstances of client including intended bequests, gifts, inheritances, one-off expenses
• Consider aged care needs (RAD/DAP)
Considerations (assumptions for calculations)
• How will client invest?
– More aggressive asset allocation ➔ higher return (& risk)
• Need to assess likely real investment return
• Allow for assumed mortality improvements
• To what survival percentile should the client be assumed to
survive?
• How should the client address longevity risk?
• Should an immediate or deferred annuity be part of the plan?
Considerations (complexity of means testing)
• Targeting stable real spending is difficult for those with assets
within the asset testing range (or just above)
– Ignoring the age pension produces significant increases in
total income as assets diminish
– However it is difficult to predict the extent to which this will
happen & hence allow for future age pension entitlements
• How to respond to age pension means testing incentives
– EMTRs are very high in certain asset ranges
– Strong incentives to adopt strategies to maximise age
pension entitlement
Possible Approaches
• Academic approach: optimise the PV of expected future utility from consumption expenditure
– Requires a utility curve – would be necessary to ensure that these curves could be robustly and stably estimated
• Stochastic approach: for example, “what expenditure can I sustain in real terms, with 90% probability?”
– Take probabilistic approach to investment returns, survival, possibly health status or aged care needs
• Deterministic approach: use an explicit formula based on “central estimate” assumptions for each relevant variable
• Update calculated drawdown regularly (control cycle)
Smoothing the more volatile approaches
• Spending will be volatile if proportional to beginning of year
assets unless constrained
• One possible constraint: smooth asset values
• OR adopt a rule limiting real spending increases or decreases
– Spend(t) = F(t)/a(x+t,r)
– Subject to 0.95*Spend(t-1)≤Spend(t)≤1.05*Spend(t-1)
– Where F(t)=balance of funds at beginning of year t
– a(x+t,r)= annuity factor for retiree originally aged x, after t years, at real interest rate r
– Spend(t)=permissible real expenditure in year t
An app for guidance
• Guidance on an appropriate level of drawdown
• Aid to retirees and those approaching retirement
• Allow for assumed mortality improvements
A simple account-based pension example
• Member inputs: retirement age, gender, retirement balance,
risk appetite, relative health
• Solve for payout
– Capital runs out at end of life expectancy (not before or
after)
– Constant real value of payouts
– Subject to legislative minimums
TRUE Re-Calculate
Member Inputs:
Gender (M, F) M
Current Age 60
Retirement Age 65
Retirement Balance $1,500,000
Life Expectancy Decile (1 to 10, i.e. shortest to longest; Average) A
Investment Risk Appetite (Low, Medium, High) M
Desired Annual Withdrawal Amount $50,000
Output:
Life Expectancy Age 87
Age at which funds run out under desired withdrawal (subject to minimum) >100
Supportable Annual Withdrawal @ Current Dollars; Investment Scenario = Best-estimate $76,160
Re-Calculate
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
65 67 69 71 73 75 77 79 81 83 85 87
ANNUAL WITHDRAWALSDesired/Minimum Withdrawal Desired Withdrawal 'Optimal' Withdrawal
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
65 67 69 71 73 75 77 79 81 83 85 87
ACCOUNT BALANCEDesired/Minimum Withdrawal 'Optimal' Withdrawal
A simple account-based pension example (ctd)
TRUE Re-Calculate
Member Inputs:
Gender (M, F) M
Current Age 60
Retirement Age 65
Retirement Balance $1,500,000
Life Expectancy Decile (1 to 10, i.e. shortest to longest; Average) A
Investment Risk Appetite (Low, Medium, High) M
Desired Annual Withdrawal Amount $100,000
Output:
Life Expectancy Age 87
Age at which funds run out under desired withdrawal (subject to minimum) 81
Supportable Annual Withdrawal @ Current Dollars; Investment Scenario = Best-estimate $76,160
Re-Calculate
0
20,000
40,000
60,000
80,000
100,000
120,000
65 67 69 71 73 75 77 79 81 83 85 87
ANNUAL WITHDRAWALSDesired/Minimum Withdrawal Desired Withdrawal 'Optimal' Withdrawal
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
65 67 69 71 73 75 77 79 81 83 85 87
ACCOUNT BALANCEDesired/Minimum Withdrawal 'Optimal' Withdrawal
A simple account-based pension example (ctd)
Future enhancements
• Consumer-oriented digital solution
• Include age pension
• Factor in non-super savings and investments including family home
• Allow for both members of a couple
• Other retirement income products – deferred annuities, lifetime annuities, group self-annuitisation products
• Allow for potential aged care costs
• Stochastic modelling
➔ Holistic view of retirement income
Questions & Discussion