Life Begins At.....
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FINANCIAL MATTERS Understanding retirement Based on research previously conducted, retirees consider the following to be the key issues they face in retirement: • Longevity – "how long will I live for, and will my capital last?" • Infl ation – "will my money be able to retain its spending power?"; and, • Income – "where will my income come from?" Longevity Our life expectancies are increasing over time. We are living on average almost seven years longer than we did in 1980. This trend is rapidly increasing due to the amazing amount of medical breakthroughs we are experiencing, as well as our increased knowledge on better living through diet and exercise. The problem is as we live for a longer period of time we also need to support ourselves for a longer retirement. This is compounded by the fact that, as a general trend, we are retiring earlier these days. There are no guarantees for how long our assets will last. It is up to each individual to plan sensibly so that the chance of having enough assets to fund his or her desired lifestyle throughout retirement is improved. Infl ation The next most important issue facing retirees is whether their capital can keep pace with infl ation. High-infl ationary periods can erode capital over time if the investor has not allowed for suffi cient exposure to growth assets. Having a large allocation in cash can actually be detrimental to an investment portfolio over the longer term. Infl ation erodes cash so even during nasty market downturns a large weighting to cash may not be the solution. One way of measuring rising living costs for retirees is via the "Analytical Living Cost Indexes", or ALCIs. The ALCIs are designed to measure the impact of changes in prices on the out-of-pocket living costs experienced by four types of Australian Chart A: Life expectancy of males and females as at December 2010 Source: Australian Life Tables 2007-09, www.abs.gov.au; RBS Morgans. households, one of them being self-funded retirees. These indexes are particularly suited for assessing whether the disposable incomes of households have kept pace with price changes. The Australian Consumer Price Index (CPI), on the other hand, is designed to measure price infl ation for the household sector as a whole and, as such, is not the conceptually ideal measure for assessing the impact of price changes on the disposable incomes of households. As an indication, the ALCI showed self-funded retiree households increasing by 1.5% for the March quarter 2011 mainly due to increases in fuel, vegetables, fruit and pharmaceuticals. Living costs for age-pensioner households, however, increased by 2.0% in the same quarter. The index for self-funded retiree households rose 3.4% for the year to March 2011 (CPI rose by 3.3% to March 2011). (Source: ALCI for Selected Household Types, Mar 2011 and Explanatory Notes, www.abs.gov.au, updated 13/05/11.) Since the series began in the June quarter 1998, the living costs of self-funded retirees have experienced an increase of 45.7%. The living costs of age pensioner households, in comparison, showed an increase of 51.3%. To keep pace with cost of living rises over time, therefore, it is imperative an investment portfolio has some exposure to growth-type assets such as Australian and international shares. Just how much exposure will depend on each individual's aversion to risk. Income sources in retirement The three main sources of income in retirement come from: 58 THE RETIREE SPRING