Why retirement solutions can't be one-size-fits-all
If you’re a baby boomer, chances are your parents worked for the same company their entire lives, and your father serviced his own car and kept a roadmap in the cubbyhole. Living to 95 would have been exceptional.
If you’re a millennial, the US Bureau of Labor says you’ll average 15 to 20 different jobs in your working life, you won't ever look under the bonnet of your car yourself (although Google could probably tell you how to rebuild your engine) and the only thing in your cubbyhole will be a USB charger for your smartphone.
Few people rely on printed maps these days; even fewer work for the same company for their entire life, but many live to 95 or beyond. Retirement solutions, too, therefore need to adapt and evolve if they are meet the needs of this modern workforce.
While there is ample advice around how to save for retirement, the decision an employee has to make at the point of actual retirement is not clear nor always clearly explained. That’s a vulnerable space for an imminent retiree who has diligently saved for decades, trusting that it will be enough.
However, even if you did start saving in your 30s and did so for 30 years, you may have made provision for only 10 or 20 years’ post-retirement income. With life expectancy on the increase, you are more likely to need an income for another 30 to 40 years. That is why it’s vital to know all your options before deciding which annuity product to buy.
‘The product you choose will affect your standard of living and your livelihood for the next 30 to 40 years. It’s a momentous decision, and making the wrong one can be extremely costly,’ says Hugh Hacking, General Manager of Operations at Old Mutual Corporate.
If you choose to access your money when you retire, there are two main decisions you'll have to make: how much of your savings to take in cash and what type of annuity to buy with the rest.
Then there are two broad categories of annuities – guaranteed annuities and living annuities – and both carry a variety of options to mitigate the inflation risk and/or the longevity risk.
There are pros and cons of different annuities
Guaranteed annuities provide an income for life and there is no risk that you will outlive your money. The level of annual income you will receive from living annuities aren’t guaranteed for life. If, say, you 'draw' a generous income at the start of your retirement your capital might shrink too quickly. At best, you will be unable to draw an income that is sufficient in later years; at worst, your capital might be depleted.
Guaranteed annuities do not allow you to bequeath the remainder of your capital and after your death and the death of your spouse, if you have a spouse attached to the policy, whatever is left will pass to the life assurance company. With a living annuity, you can leave whatever remains to your heirs – an option many people find very attractive.
As you can see, there are many variables to consider and each person has unique circumstances that will influence their decision. That’s why Old Mutual Corporate has developed a decision support framework to help you to decide. In a sense, it is a GPS for the journey to retirement.
‘We stepped back and examined the key issue people face as they hit retirement, which is making the right decision. We specifically looked at building mechanisms to help them to understand what they need to do next, what questions they should be asking and how they should frame their decisions,’ says Hacking.
‘This support mechanism engages members well before their retirement date to allow them time to consider their options appropriately, and not to be rushed. This decision support infrastructure is backed by product solutions ratified by the trustees of the Old Mutual SuperFund.’
The role of the employer
Employers formally relinquish responsibility for employees’ income when they retire, but that doesn’t mean they don’t have a role to play in providing access to financial education in the time leading up to retirement.
‘Companies like Old Mutual Corporate should provide mechanisms to guide employees through all the steps when they retire and employers have to allow employees access to such services, within reason of course,’ says Hacking.
That said, employers play a crucial role in encouraging employees to start saving early in their careers and facilitating this. Employers should also consider employees’ profiles and decide which key objective they want to help them with. For example, making membership of and contributing to a retirement fund compulsory for all employees will benefit them greatly in the long run.
Protection – finding a balance between life insurance and disability cover – is equally important. The type and extent of protection an employee needs, will depend on their life stage and circumstances.
It is possible to find an optimised package that caters for all your employees through Old Mutual SuperFund that uses OnTrack, to show employers whether their company retirement fund is on track to deliver what is promises employees.
Hugh Hacking, General Manager of Operations for Old Mutual Corporate, is an engineer, MBA graduate and CFA charter holder. He has extensive employee benefits experience and managed the development of umbrella fund products for Old Mutual Corporate.