代写 UNSW ACTL5401 Retirement Planning

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代写 UNSW ACTL5401 Retirement Planning

Copyright 2016

Australian School of Business

School of Risk and Actuarial Studies

ACTL5401 Retirement Planning

(Distance Learning)

Topic 3: Risks in Retirement – 1

Topic 3 & 4- Key Learning Objectives

1. Appreciate the retirement goals of pre and actual retirees

2. Become familiar with the key economic, financial and other risks

people face as they enter and move through retirement.

3. Understand the impact of these risks for retirement needs, plans

and options .

4. Gain an initial awareness of HOW to manage these risks before

and through retirement.

Topic 3 - Key Themes

1. Retirees goals will include an income target, preserving capital and

risk management

2. Near to and actual retirees face a number of economic, financial

and other risks including – replacement risk, employment risk,

longevity risk, inflation risk, investment risk, contingency risk,

default risk, political risk

3. Retirement plans should cater for these risks:

I. Many people do not retire when expected due to health

conditions, job loss, carer responsibilities

II. Lifetimes are difficult to predict, but those who live longer than

expected may outlive their savings

III. Inflation erodes savings and reduces future spending power.

Continuation of low inflation is not guaranteed

Topic 4 - Key Themes

3. Retirement plans should cater for these risks:

IV. Retirees are vulnerable to both too little and too much

investment risk. Near to and recent retirees are particularly

vulnerable to sequencing risk

V. Retirees appear unprepared for contingency risk, particularly

relating to unexpected health and aged care expenses

VI. Political risk is real. There is no guarantee that publicly provided

benefits and tax provisions will remain unchanged

Topic 3 & 4 - Outline

1. Retirement goals

2. Economic, financial and other retirement risks: An overview

3. Employment risk

4. Longevity risk

5. Inflation risk

6. Investment risk

7. Contingency risk

8. Default risk

9. Political risk

10. Other risks

11. Implications for retirement income goals

Topic 4

Topic 3

Topic 3 - Essential Readings

Overall reading

 Society of Actuaries (2011), Managing Post-retirement Risks.

Employment risk

 ABS Retirement and Retirement Intentions (ABS 6238.0), Summary of

Findings and Article: Changing Retirement Intentions and Behaviours – An

Age Cohort Analysis.

Longevity risk

 Actuaries Institute (2012), Australia’s Longevity Tsunami.

Investment risk

 Finsia (2012), Sequencing Risk: A Key Challenge to Creating Sustainable

Retirement Income.

Contingency risk

 ABS 4367.0 - Aspects of Disability and Health in Australia, 2007-2008.

Political risk

 Productivity Commission (2013), An Ageing Australia: Preparing for The

Future.
代写 UNSW ACTL5401 Retirement Planning

1. Retirement goals

What are typical goals of pre and actual retirees?

Retirement goals

Income

Capital &

Liquidity

Goal?

Address retirement risks

Replacement risk

Employment risk

Longevity risk

Inflation risk

Investment risk

Contingency risk

Default risk

Political risk

Goal?

Maintain lifestyle

Goal?

Funds to enable lumpy

expenditures,

unexpected

expenditures &

bequests

Retirement

Risks

Strategies

2. Retirement risks

Read: Society of Actuaries (2011), Managing Post-Retirement

Risks.

Retirement risks

 People are exposed to a variety of risks as they enter

retirement and after they have retired

 These risks affect retirement needs, plans and options

 It is important to understand and manage these risks in order

to achieve and maintain desired living standards in

retirement

 Failure to manage risks could result in retirees outliving

savings, lower standard of living, smaller bequests

Retirement risks

Replacement risk

Employment risk

Longevity risk

Inflation risk

Investment risk

Contingency risk

Default risk

Political risk

* Will be covered in Topic 5 12

Retirement risks

Replacement risk The risk of inadequate retirement income *

Employment risk The risk that retirement from the labour force differs

from plans

Longevity risk The risk of outliving savings

Inflation risk The risk of erosion of purchasing power

Investment risk The risk of unevenness in income due to volatility of

investment returns

Contingency risk The risk associated with an unexpected (and/or

uninsurable) event – such as health or aged care

expenses

Default risk The risk of default of a retirement benefit provider

Political risk The risk of policy changes which eliminate or dissipate

benefits

* Will be covered in Topic 5 13

3. Employment risk

Read: Society of Actuaries (2011), Managing Post-Retirement

Risks.

Employment risk

The risk associated with uncertainty of employment

status – in particular that retirement from the labour

force differs from plans

Employment risk

The risk associated with uncertainty of employment status

 Pre-retirement: a loss of anticipated income or forced early

retirement with the need to prematurely dip into

superannuation savings

 Retirement is often earlier than planned, often because of

job loss, poor health or unforeseen life events

 Post-retirement: a loss of anticipated income to supplement

retirement savings by working (possibly part time) during

retirement

 As well as job insecurity, people may experience fluctuations

in income

Employment risk – planned age at retirement of

current workers

In 2012-13, of the 3.7 million in the labour force who indicated that

they intend to retire, 37% did not know the age they would retire. Of

those who did indicate an age:

 17% intend to retire at 70 years or older (19% men, 15% women)

 49% intend to retire between 65 and 69 years (53% men, 45%

women)

 25% intend to retire between 60 and 64 years (22% men and

29% women)

 9% intend to retire between 45 and 59 years (7% men, 12%

women)

Source: ABS 6238.0 Retirement and Retirement Intentions 2013

Employment risk – age at retirement of current

retirees

In 2012-13, the average age at retirement from the labour force for

people aged 45 and over was 53.8 years (58.5 for men and 50.0 years

for women)

 Of the 1.5 million men who had retired:

 25% had retired aged < 55

 50% had retired aged 55-64

 25% had retired aged 65 and over

 Of the 1.9 women who had retired:

 55% had retired aged < 55

 36% had retired aged 55-64

 9% had retired aged 65 and over

[However, average age at retirement for those who had retired in the past 5

years was older at 61.5 (63.3 men and 59.6 women)

Source: ABS 6238.0 Retirement and Retirement Intentions 2013

Retirement is often earlier than planned

Expectation vs. Reality

72% of male workers

intend to work until at

least age 65

Expectation vs. Reality

60% of female workers

intend to work until at

least age 65

Persons retired from Labour Force – by age and gender

Source: ABS 6238.0 Retirement and Retirement Intentions 2013

Employment risk – of those intending to retire,

main factor influencing decision

Source: ABS 6238.0 Retirement and Retirement Intentions 2013

Employment risk – of those currently retired, why

did they leave work?

Source: ABS 6238.0 Retirement and Retirement Intentions 2013

Employment risk – main expected source of

income at retirement

Source: ABS 6238.0 Retirement and Retirement Intentions 2013

Employment risk – actual source of income of

current retirees

Source: ABS 6238.0 Retirement and Retirement Intentions 2013

Employment risk – there is often a mismatch –

with retirement earlier than planned

According to ABS (Australian Bureau of Statistics) 6238.0 - Retirement and

Retirement Intentions (2013):

 People say they plan to retire when:

– Finances are in order - 45% of men, 44% of women

– Physical capacity or health decline - 26% of men, 28% of women

– Eligible for Age pension/superannuation - 21% of men, 18% of women

 They actually retire when:

– Eligible for Age pension/superannuation - 52% of men, 40% of women

– Health fails (especially younger retirees) - 30% of men, 28% of women

– Redundancy or unemployment - 11% of men, 14% of women

– Take care for partner or family - 2% of men, 10% of women

Source: ABS 6238.0 Retirement and Retirement Intentions 2013

Employment risk – as well as job insecurity, people

may experience fluctuations in income

Employment risk – key points

 Many people retire earlier than planned

 However, behaviour is changing – people both planning to

and actually retiring at older ages

 Many people retire unexpectedly – due to health,

retrenchment, carer responsibilities

 There may be barriers to continued employment:

 Age discrimination

 Skills

 Age Pension means tests

 Access to other public support or benefits

 As well as job insecurity, people may experience fluctuations

in income

4. Longevity risk

Read: Actuaries Institute (2012), Australia’s Longevity Tsunami.

Longevity risk

The risk of living longer than expected – and outliving

one’s savings (that is, of running out of money)

As noted in Topic 1: Life expectancy is increasing......

1891-00 1920-22 1946-48 1960-62 1970-72 1980-82 1990-92 2000-02 2010-12

Life expectancy

Life Tables

Total life expectancy at selected ages (males)

At age 0 At age 30 At age 65

1891-00 1920-22 1946-48 1960-62 1970-72 1980-82 1990-92 2000-02 2010-12

Life expectancy

Life Tables

Males vs. females, life expectancy at birth

Males Females

Males 79.9*

Females 84.3*

Key issues to a better understanding of life

expectancy

 Commonly used indicator of life expectancy is the ‘raw’ LIFE

EXPECTANCY AT BIRTH

 While there have been large improvements in mortality over

the past 100 years, the raw life expectancy data does not

take into account two important factors

 Future improvements in mortality (period life expectancy)

 Improvements over an individual’s lifetime (cohort life

expectancy)

 Taking into account both factors, many individual retirees are

likely to live for a long time and for retiree couples, there is a

significant likelihood that one member of couple will live for a

VERY long time.

Key fact: Standard Life Tables underestimate life

expectancy

 The 2010-12 Life Tables tell us that Life Expectancy at birth (in

2012) is 80.3 for males and 84.6 for females. However using

COHORT life expectancy a male born in 2012 is projected to

live for 91.6 years and a female for 94.4 years.

 There is still an impact for current pre and actual retirees:

 The 2012-12 Life tables tell us that a 65 year old male is expected to

live for 19.1 years (to age 84.1) and a 65 year old female by 22 years

(to age 87). Cohort life expectancy will be higher. Forecasts by the

Australian Government Actuary in 2009 suggest that men may live to

around 85 and women to age 88 (more recent estimates suggest

approx 86 and 89).

 We also know that forecasts of life expectancy are regularly

revised up.

Standard Life Tables underestimate Life

Expectancy

Males Females

Life expectancy at birth

(2010-12 Life Tables)

80.3 84.6

(Period) Life expectancy

at age 65 (2010-12 Life

Tables)

84.1 87.0

(Cohort) Life expectancy

at age 65 (recent

estimates)

86.2 89.0

At a minimum these higher ages should be used in retirement planning

Key fact: Life expectancy is an average. 50% of

those alive at age 65 will live for long than life

expectancy at age 65

MALES FEMALES COUPLE *

Life expectancy at age 65

(2010-12 Life Tables)

84 87 90

40% still alive at age .. 87 90 92

25% still alive at age .. 90 93 94

10% still alive at age .. 94 97 98

5% still alive at age .. 97 99 >100

* Period Life expectancy. At least one of a couple currently both age 65 still

alive at age …

Probability of survival

100

65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99

Male Female At least one spouse

Probability of a 65-year-old living to various ages

78 81 86

84 87 90

90 93 94

How to calculate survival probabilities?

e.g. What is the chance that a 55 year old

male will live at least another 10 years?

The life table (also referred to as the mortality

table) allows us to determine chances of

survivorship (and death) and average remaining

years of life (life expectancy), for specific years of

age.

 Life tables are usually constructed separately for

men and for women because of their

substantially different mortality rates

Life table explained:

 The life table shows for each age x

 ? ? : the number of persons surviving to age x

(assuming we start with a base of 100,000 new born

individuals)

 ? ? : the life expectancy at age x

Using life tables to determine life expectancy and

survival probabilities

Male Life Table*

x l x e x

Age no. years

0 100,000 80.3

1 99,615 79.6

2 99,581 78.6

…

55 94,090 27.9

56 93,672 27.0

57 93,220 26.1

58 92,733 25.3

59 92,209 24.4

60 91,645 23.5

61 91,035 22.7

62 90,374 21.9

63 89,657 21.0

64 88,879 20.2

65 88,034 19.4

…

80 62,162 8.7

…

90 24,185 4.2

Source: Australian Bureau of Statistics, 3302.0.55.001 - Life Tables, Table 1.9 Life Tables, Australia, 2012–2014.

http://www.abs.gov.au/ausstats/[email protected]/mf/3302.0.55.001. Note: Life tables are updated and published regularly.

Life table explained:

 The life table shows for each age x

 ? ? : the number of persons surviving to age x

(assuming we start with a base of 100,000 new born

individuals)

 ? ? : the life expectancy at age x

e.g. Life expectancy at birth

 ? ? (where x=0)  ? 0 = 80.3

Interpretation: a new born boy can expect to live, on average,

until age 80.3

e.g. Life expectancy at a particular age (e.g. 55, 65)

 ? ? (where x=55)  ? 55 = 27.9

Interpretation: a man reaching age 55 today can expect to live,

on average, for another 27.9 years, i.e. until age 82.9 (27.9 + 55)

 ? ? (where x=65)  ? 65 = 19.4

Interpretation: a man reaching age 65 today can expect to live,

on average, for another 19.4 years, i.e. until age 84.4 (19.4 + 65)

Using life tables to determine life expectancy and

survival probabilities

Male Life Table*

x l x e x

Age no. years

0 100,000 80.3

1 99,615 79.6

2 99,581 78.6

…

55 94,090 27.9

56 93,672 27.0

57 93,220 26.1

58 92,733 25.3

59 92,209 24.4

60 91,645 23.5

61 91,035 22.7

62 90,374 21.9

63 89,657 21.0

64 88,879 20.2

65 88,034 19.4

…

80 62,162 8.7

…

90 24,185 4.2

Source: Australian Bureau of Statistics, 3302.0.55.001 - Life Tables, Table 1.9 Life Tables, Australia, 2012–2014.

http://www.abs.gov.au/ausstats/[email protected]/mf/3302.0.55.001. Note: Life tables are updated and published regularly.

The longer you live, the longer you can expect to live!

Life table explained:

 The life table shows for each age x

 ? ? : the number of persons surviving to age x

(assuming we start with a base of 100,000 new born

individuals)

 ? ? : the life expectancy at age x

e.g. What is the chance that a 55 year old male

will live at least another 10 years?



? 55+10

? 55

? 65

? 55

8834

94,090

= 93.6%

e.g. What is the chance that a 55 year old male

will live until age 80 and 90?



? 80

? 55

62,162

94,090

= 66.1%



? 90

? 55

2185

94,090

= 25.7%

Using life tables to determine life expectancy and

survival probabilities

Source: Australian Bureau of Statistics, 3302.0.55.001 - Life Tables, Table 1.9 Life Tables, Australia, 2012–2014.

http://www.abs.gov.au/ausstats/[email protected]/mf/3302.0.55.001. Note: Life tables are updated and published regularly.

Male Life Table*

x l x e x

Age no. years

0 100,000 80.3

1 99,615 79.6

2 99,581 78.6

…

55 94,090 27.9

56 93,672 27.0

57 93,220 26.1

58 92,733 25.3

59 92,209 24.4

60 91,645 23.5

61 91,035 22.7

62 90,374 21.9

63 89,657 21.0

64 88,879 20.2

65 88,034 19.4

…

80 62,162 8.7

…

90 24,185 4.2

Furthermore, people under estimate their own life

expectancy

Results of survey on retirement planning revealed*:

 Men in their 50s

 Underestimated lifetime (compared to the Life Tables) by 6

years on average

 Men in their 60s

 Close to improved life table expectations

 Women in their 50s

 Underestimated lifetime by 7 years on average

 Women in their 60s

 Underestimated lifetime by 5 years on average

*May 2011, Retirement Planning Survey (Agnew, Bateman, Thorp)

Why does it matter if people underestimate their

own life expectancy?

Why does this matter?

Even with higher retirement ages it is likely that people

will spend more time in retirement than they expect

15 20 25 30

Ireland

Japan

Denmark

Greece

New Zealand

Canada

Australia

Italy

Germany

Finland

France

Female

2010 2030

-30 -25 -20 -15

Male

2000

Expected number of years

spent in retirement

If retirees underestimate the amount of time they are going to

live in retirement  they may spend too much, too quickly

Source: Fidelity Investments. Hypothetical value of assets held in an untaxed account of $500,000 invested in a portfolio

of 50% stocks, 40% bonds, and 10% short-term investments with inflation-adjusted withdrawal rates as specified.

Longevity risk – key points

 Longevity risk is the risk of living longer than expected and outliving

one’s savings

 Life expectancy at older ages is increasing

 Higher estimated life expectancy is not reflected in ‘standard’ life

tables

 Lifespan is very difficult to predict with any certainty, but we know

that many people will live longer than they expect

 Planning approaches based on living to a specific age (often set in

reference to average live expectancy) will be inadequate for around

half of all retirees

 For current retiree couples – at least one of a retiree couple could live

well into their 90s

 Retirement plans need to cater for an uncertain and longer than

expected life

What do planners need to know?

 Lifetimes are difficult to predict for individuals

 Longevity has increased over time and medical break

throughs could bring additional improvements in mortality

 Planning to live to the average life expectancy will be

inadequate for about half of retirees

 Retirees need to plan for their ‘unknown’ but very likely

longer than expected lifetime

Take the test - how long will you live?

http://www.mylongevity.com.au/

5. Inflation risk

Inflation risk

The risk of erosion of purchasing power

Inflation risk

The risk of erosion of purchasing power

 Inflation increases the future costs of goods and

services, erodes relative purchasing power, which

needs to be maintained in order to maintain a

consistent standard of living

 Inflation is difficult to predict more than a few years

out, which is a problem when you are saving over a

working life of several decades, and then arranging

retirement income to cover a further two decades

or more

Inflation risk

The inflation rate is now stable and historically low, but has

been much higher in the past, often for extended periods

Inflation risk

The inflation rate is now stable and historically low, but has

been much higher in the past, often for extended periods

Inflation risk

Even low rates of inflation can seriously erode the well-being of retirees who

live many years, a period of unexpectedly high inflation can be devastating for

those living on a fixed income.

Impact of inflation on a non-indexed retirement benefit of $50,000 p.a.

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

0 5 10 15 20 25 30

2% 5% 10%

$50,000

$27,831

$11,297

$2,355

$33,380

$17,924

$6,079

$40,854

$29,937

$17,434

Inflation

Inflation risk

 The Age Pension provides benefits that are increased in line

with inflation

 However, private retirement savings (e.g. superannuation)

typically offer no automatic inflation projection

1% 2% 3% 4% 5%

NUM OF YEARS IN RETIREMENT

(COMFORTABLE LIFESTYLE)

INFLATION

Assumptions: Number of years a representative investor, who relies on superannuation guarantee contributions

only, is able to maintain a comfortable lifestyle in retirement. Assumptions: Starting Salary = $60,000, Salary

increase = 4%, Investment return = 5%, Comfortable lifestyle - Single $42,000 (in 2014 dollars)

Inflation risk

 Many investors try to own some assets whose value may

grow in times of inflation (e.g. equities, properties,

commodities), however, this sometimes results in trading

inflation risk for investment risk

 Retirees should set aside assets that will permit a gradual

increase in consumption, and/or consider investing in

inflation-protected securities (e.g. inflation-indexed Treasury

bonds) and retirement benefit products with a cost-of-living

adjustment feature (e.g. inflation-indexed annuities)

 In addition, retirees can choose to continue working - even if

it is only on a part-time basis (earnings tend to increase in

line with prices)  subject to employment risk

Inflation risk – key points

 Inflation increases the future costs of goods and services –

which will erode the purchasing power of fixed income

 Holding shares and property do not necessarily provide

insurance against increases in inflation

 The inflation rate is low and stable now, but has been high an

unstable in the past

 Inflation is difficult to predict more than a few years out

 Even low rates of inflation can seriously erode the well-being

of retirees who live many years

11. Implications of risks for retirement

planning

Jumping ahead………

Impact of retirement risks – a simple example

Consider the following 3 retirees:

 Kim receives the Age Pension. This is currently pays $19,916 per

annum and is indexed to the consumer price index. Kim has few

assets and will receive the Age Pension for as long as she lives.

 John has $500,000 in a cash option in a superannuation fund and

draws down 7% of capital each year. He has no other income or

assets. [For now ignore the Age Pension and any superannuation

rules]

 Ada has $500,000 invested in a balanced option in a

superannuation fund and draws down 7% of capital each year.

She has no other income or assets. [For now ignore the Age

Pension and any superannuation rules. The balanced option is

invested 70% in equities and 30% in cash and fixed interest]

To what extent are these retirees covered for the

key retirement risks?

Kim - Age Pension John - Term deposit Ada - Equities

Employment risk

Longevity risk

Inflation risk

Investment risk

Contingency risk

Default risk

Political risk

To what extent are these retirees covered for the

key retirement risks?

Kim - Age Pension John - Term deposit Ada - Equities

Employment risk NO NO NO

Longevity risk YES NO NO

Inflation risk YES NO NO

Investment risk

Contingency risk

Default risk

Political risk

Main takeaways

Topic 3 - Key Themes

1. Retirees goals will (should?) include an income target, preserving

capital and risk management

2. Near to and actual retirees face a number of economic, financial

and other risks including – replacement risk, employment risk,

longevity risk, inflation risk, investment risk, contingency risk,

default risk, political risk

3. Retirement plans should cater for these risks:

I. Many people do not retire when expected due to health

conditions, job loss, carer responsibilities

II. Lifetimes are difficult to predict, but those who live longer than

expected may outlive their savings

III. Inflation erodes savings and reduces future spending power.

Continuation of low inflation is not guaranteed

代写 UNSW ACTL5401 Retirement Planning