Accountants can add great value in helping clients plan for dealing with the uncertainties of retirement, whether due to market changes or their clients’ own lifespans.
Accountants’ skills position them as a key support and coach for their clients through cash management expertise, according to Melanie Dunn, SMSF Technical Services Manager from Accurium, at the Accounting Business Expo in Sydney in March 2018.
Managing uncertainty and concerns
Retirees typically face three key risks: market risk, inflation risk and longevity risk. Clients tend to be well aware of the pressures on their money.
“Clients are concerned about outliving their finances, whether they’ll have enough to pay for aged care and medical expenses, and in some cases, being able to leave money to loved ones,” says Dunn.
SMSF clients are no exception to these concerns. Dunn suggests this audience is likely to be healthier than average Australians. For example, their wealth can provide greater access to health support over their lifetime. These people are then more likely to live longer, requiring their finances to last longer.
How much longer finances might need to last is a different question. According to Dunn, when you consider life expectancy (whether single or a couple together) and regular improvements in mortality, clients could need to fund living expenses for 35 years after retirement.
Helping clients plan for and live in retirement
“Helping clients with retirement needs to focus on strategy, not product. There are two parts: investment choices and cashflow management decisions. Spending is a big part of sustainable retirement so accountants can help here,” says Dunn.
With some SMSF clients viewing their accountants as a check-box requirement to run compliance or administration, this opens the opportunity for accountants to demonstrate their valuable skills and expertise for a higher level of service. In light of the increasing sophistication of administrative technology, this is an opportunity for accountants to deepen the relationship with clients and remind them of the true benefits and service options available to them for the longer term.
Retirement planning discussions can start with the simple things – budget, then moving to changing life circumstances from there.
Some clients may overestimate their expected expenditure in retirement, meaning that drafting out a budget can help them with a more accurate assessment of their needs, while many may assume the same annual spending needs for life. For both types of clients, it can be helpful to discuss with them how their cashflow needs may change over the course of their lives.
For example, the more expensive years for retirees may be in the first decade post-retirement while they are still active and able to enjoy and participate in activities like travel. Annual cashflow also changes if a partner passes away. Understanding this may help retirees plan better for how their cashflow may change and assist them in budgeting in a way that will help their funds last longer.
It is also helpful to discuss cost of living and inflation – for example, planned income of $80,000 a year may feel like it’s only $30,000 a year in 20 years once inflation is taken into account.
Some fears can also be managed by mapping out where income might be coming from. For example, some clients may be able to consider accessing a partial or full aged pension at a later point in their retirement, with their existing savings offering a supplement for smaller luxuries.
Developing confidence in retirement planning
Dunn advocates stochastic modelling as a useful option for showing clients their options and the confidence they can have in their finances lasting. Stochastic modelling uses the complete data available on clients – their retirement savings, sources of income, planned budget, life expectancy and inflation – to map their statistical probability of a sustainable retirement factoring thousands of scenarios.
This can be a useful tool for strategic, rather than product, advice in retirement by demonstrating the impact of spending decisions on the likelihood of finances lasting. For example, it might show one client that reducing spending slightly earlier than originally planned might see a better probability of success in the long term. Conversely, it might demonstrate that their planned spending habits would see them run out of their savings early in retirement and changes might be required. There are a range of tools available offering this service.
For those accountants holding an Australian Financial Services Licence, this might also pave the way to discussions on investment choices for those clients who need help in this area. It could also be an opportunity for a collaborative approach to client service with a financial adviser, should the client already have a financial adviser or wish to speak to one.
Australian businesses and industries are already grappling with the opportunity that servicing an aging – and retiring – population provides. In this sense, accountants could be a step ahead, with their cashflow management expertise a natural fit to help clients with future and existing retirement spending needs.
This communication has been prepared for use by accountants only. It must not be made available to any retail client and any information in it must not be communicated to any retail client or attributed to this article. This information has been prepared by Westpac Banking Corporation ABN 33 007 457 141 AFSL & ACL 233714 (Westpac) and is current as at 27 March 2018. The information provided is general in nature and does not take into account your objectives, financial situation or needs and therefore, before acting on it, you should consider whether it is appropriate for you It may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Past performance is not a reliable indicator of future performance. You should consider whether or not provision of SMSF financial advice services is appropriate for you. ©Westpac Banking Corporation 2018