How the Retirement Strategy Tool helps your clients

We’ve built a retirement strategy tool based on our conversations with you

Over the past few years, we’ve listened to your needs and built a new tool based on these conversations. The methodology integrates Morningstar’s investment and behavioural science expertise, culminating in a dynamic, adaptive, and intuitive tool to help you facilitate richer conversations with your clients about the challenges they might face in retirement.

The retirement challenge is easy to express but hard to solve. At its core, it is about cash flow management; what you have, what you’ll need, and when you’ll need it. The goal is to ensure your clients can meet their future requirements from the assets they’ve accumulated.

Getting the most out of the next chapter for your retiree clients

From an adviser's perspective, the tool helps illuminate the trade-offs associated with different spending and investment decisions. The tool creates a spending schedule designed to help retirees get the most out of their retirement. You can then revisit and amend goals with your client to illustrate how different anticipated spending needs have implications on how to invest.

From the beginning, the tool facilitates deeper consideration in your client conversations: starting with fundamentals in the retirement planning process to input into the tool and allowing for adjustments and variables in aspects like age, gender and wealth for flexibility and easy customisation for each client. Then, you move into asset allocation modelling, where our dynamic decumulation model uses capital market assumptions, your client’s wealth, and spending requirements to determine an underlying asset mix. Once this is determined, the asset mix is divided into three investment ‘buckets’: short-, medium- and long-term.

These steps are regularly repeated and iterated to reflect updated goals, changing spending patterns or requirements, and portfolio performance. Effectively, the asset allocation will be reassessed based on these goals and needs, and then the buckets once again emerge from that process.

The tool in action

Scenario 1: John

In scenario 1, we have a 69-year-old man: let’s call him John. John owns his own home and spends $50,000 per year. He had around $1,900,000 available to invest and $100,000 in cash reserves. His preference was to take on low risk – deciding that he would be willing to put a maximum of 60% of his investable money into high-growth assets. In John’s mind, he’s concerned that he won’t be able to retire, or won’t be able to take on more risk with a higher amount in the high-growth asset bucket.

Once these amounts are entered into the retirement tool as part of this clients’ conversation with his adviser, we can see that he’s actually overprovisioned: not necessarily spending the money that he’s accumulated over the years and can afford to spend. It’s just as important in retirement that clients like John can enjoy the fruits of their labour as it is that they’re adequately prepared for costs like aged care, bequests or even holidays. And as their adviser, you know your client best: you can have these conversations with them at the annual review process, adjusting for costs as they come up or by taking on more risk, as may be appropriate for John. We can see that based on his expenses, he’s in a good position for retirement, and in conversation, you may both decide he could spend a little more. In John’s case, that could be up to $12,000 more per year – perhaps a holiday or could go towards a new car.

“Being able to visualise what the strategy means is key to how this tool supports advisers and their clients,” says Deborah Graham, Senior Manager, Adviser Solutions. “The benefit is that the display is quite simple and therefore easy to use with clients. It makes what’s normally an intangible conversation very tangible.”

Scenario 2: Sandra

Let’s now look at Sandra.

Let’s now look at Sandra. She’s 67, she rents her home, is close to retirement and spends a lot less than John – her total spending is around $20,000 a year on top of what she pays for rent. She has $24,000 in cash and $750,000 in investable assets. She’s fairly new to the advice process, and has engaged an adviser because her concern is about lifestyle: she’s adjusting her lifestyle because she doesn’t believe she has enough money to last through retirement. This means she scrimps; out of habit and the fear of retiring with insufficient funds. She’s also got a low risk tolerance, opting for a maximum of 50% of her assets going to the high-growth bucket.

In using the tool, we can see that Sandra is also well over-provisioned – more than John, even though she has less money than him. “This client is making trade-offs in her head, such as always buying the cheapest option or not going out to dinner”, says Graham, “rather than the one that best suits her needs. She had it in her mind that because she was nearing retirement that meant that she shouldn’t spend money anymore. In reality, she was in great shape financially and by understanding her options and trade-offs, she was given the confidence to stop worrying so much and to start enjoying the next phase of her life.”

In fact, the trade-offs she should be making are around how much money she can spend – we can see, by trialling different numbers in the tool, that she could spend 3x more per year, or increase her risk tolerance. Again, this is a conversation that you as an adviser will be having routinely with your clients, assessing their comfort with spending more, adjusting the numbers as their life stages change. For Sandra, you can also project to the following year, entering her age as 68 at retirement, and you can track progress in the graphs at the upper right of the tool. These graphs also consider the age pension. If a client needs the age pension earlier, perhaps you’d suggest that they spend more to receive the amount nominated after their assets and income test.

Scenario 3: Simon

Conversely, you may also have somebody like Simon, who continues to spend the same way he did before retirement. Perhaps your client wants to pay for their grandchildren’s school fees. After calculating these numbers for Simon, with all the relevant information around homeownership, investable assets and cash, the tool demonstrates that he’s under-provisioned and would have to make the decision to reduce spending, provide less for school fees, and so on. Again, by adjusting the numbers, the tool will demonstrate how client Simon’s retirement is likely to play out if he makes some significant changes, moving from under-provisioned to the ‘green zone’.

A discussion around increasing Simon’s tolerance to risk and its impact can be demonstrated by the tool as it can assign an asset mix which is more aligned with achieving his retirement goals.

“The tool bridges the gap between what a client may want and what is actually possible,” says Graham. “And it works in reverse as well. It improves confidence in the client’s money allowing them to have the retirement they want to have.”

The beauty of buckets

The bucketing strategy takes advantage of a well-known behavioural tendency known as ‘mental accounting’, identified by Nobel Prize winner Richard Thaler. Different mental accounts can help people make sense of their money and sometimes even improve their self-control as they weigh different alternatives. It’s the same with the retirement tool: using investment buckets to define roles for how money works in a retirement plan. We do this to promote good decision-making. Well-constructed mental accounts can bolster willpower and help people understand the connections between what they do now, and what that means for them later. This kind of framing can promote better long-term decision making and builds on how people already think about managing their resources.

The bucketing strategy is also valuable in the case of turbulent markets. To mitigate the effects of sequencing risk – or a case of poor timing, where the market drops at the time of retirement – the tool shows that investors can draw from the moderate bucket, which has a lower additional aim to CPI, while letting the high-growth bucket continue to work through the turbulence.

Smart decisions today = A safe and secure future

The tool combines best practice methodology with a simple and intuitive interface that aims to deepen the ongoing retirement planning engagement process. The tool helps form a holistic investment strategy built around client goals and provides actionable guidance about the trade-offs and opportunities clients have during retirement. The purpose is to plan for a safe and secure future by helping your clients make smart decisions today.

Want to learn more about the Retirement Strategy Tool? Click here to access our Adviser Toolkit. Alternatively, contact your Adviser Solutions Manager or email [email protected].

To view this article on the Adviser Toolkit, click here.