At a recent seminar we attended, the speaker referred to a study in which people were asked if they thought they would live past 85 years of age. 50% of the respondents said yes.
Interestingly though, 70% of those same respondents thought they would die before age 85???
That huge discrepancy highlights how the wording of a question can dramatically influence important research data.
However whether it is 50% of us living past 85 or just at 30%, it is obvious that our capital needs to work for a lot longer than was historically the case. Clients often laugh when we talk about projections to age 100, but the reality is that plenty will get there!
This is one reason that we would generally disagree with a new approach by many large superannuation funds to tailor their default superannuation offerings according to age. The thinking is that as members approach age 65 they become more conservative in outlook and require greater certainty of capital rather than the prospect of higher earnings. Some funds therefore have adopted a policy of automatically reducing the exposure to shares and other growth assets according to age bands. This could mean that at age 65 a member may have only 20% of their superannuation in growth assets.
Our issues with this approach are twofold. The first is obviously the longevity factor alluded to above. If we are planning to invest for a period of 35 years, we do not see any justification for a very low exposure to assets that historically have proven themselves to derive significantly higher earnings over the long-term. To do so would mean that the client must have much higher levels of capital to start with, or must expect a lower standard of living in order to eke out the capital. If our client accepts that argument, it will be necessary to return to a higher growth option at the point of retirement.
This leads us to the second issue. We know from experience that it is difficult to invest large lump sums for clients who have not previously had experience with investment markets. This is commonly the situation where there is an inheritance or a business has been sold. It is far easier to discuss issues such as appropriate asset allocation with clients who have been exposed to markets for many years. Consider a superannuation fund member who is retiring with a large lump sum that has been built on the back of a well-diversified superannuation portfolio. To us, it seems likely that person will have confidence in using a similarly weighted portfolio throughout retirement, so a huge reduction in risk at that time would result in a poor long term outcome.