Beyond accumulation: Helping clients solve the retirement spending challenge

For many advisers, helping clients build wealth is only half the job. The bigger challenge often comes in retirement, when clients need to turn their savings into a reliable income stream – while balancing running down capital, keeping access to it, or both.

Auckland-based financial adviser Edward Glennie of Genesis Advice says the Lifetime Retirement Income Fund (LRIF) can play a useful part in this planning process for some clients.

While Lifetime Retirement Income is not suitable for every retiree and should be considered alongside a client's wider financial circumstances and objectives, Glennie believes the structured approach it provides, by using retirement savings to create a regular fortnightly income spread out over time, can be beneficial.

This is particularly so for clients who either fear spending too much too soon and need the financial discipline it provides, or who become so focused on preserving capital that they unnecessarily restrict their lifestyle. In Glennie's view, the structured income approach can help some clients make spending decisions with greater confidence.

“It takes some of the guesswork out of it,” he says. “You're actually putting it in a structure that pays you out over time.”

Glennie says that as New Zealand's population ages, more retirees will need solutions that focus not just on growing wealth, but on confidently – and sustainably - spending it.

Overcoming reluctance to spend

Glennie first became familiar with Lifetime Retirement Income through legacy AMP clients, when Lifetime Asset Management took over AMP’s Superannuation Master Trust. While some clients chose to withdraw their money and move elsewhere, others saw value in retaining or adding to their Lifetime investments.

Over time, he has found Lifetime Retirement Income’s proposition relevant for those older retirees who have accumulated savings but may be reluctant to spend them.

While term deposits may suit investors seeking capital certainty, and many continue to rely heavily on them, Glennie says some struggle with the reality of the ever-changing interest rate environment and uncertainty about how much of their retirement savings they can safely spend without running out.

“(With term deposits) they know rates are going to rise and fall,” he says. “And then they’re still getting their principal back – but they don't necessarily need that principal.”

That reluctance to spend capital is a behavioural challenge facing many retirees. Often, they feel obliged to hold onto money for future generations, even when their children would prefer they use it to improve their own retirement, he says.

“My mum has always gone on about wanting to leave money for her children,” he says. “And all three siblings keep saying, ‘Mum, I'd rather you spend the money.'”

For Glennie, Lifetime Retirement Income offers a structured way of addressing this hurdle.

“Part of the logic is that by its very structure, it would take care of the need for you to leave anything because you would have spent it,” he says. But in a sustainable way.

Glennie says this may appeal to retirees whose priority is maximising their own retirement lifestyle rather than preserving assets for inheritance.

The manager-of-managers underlying investment approach can be difficult to explain to clients, Glennie says. However, Glennie notes that in times of strong market performance, investment returns may contribute to some of the income needs. However, clearly investment returns are not guaranteed, and capital values can rise and fall over time.

He also likes that the fees are fully disclosed and embedded in the product’s structure, so estimates from the product calculator already include them and don’t have to be reworked.

“It makes it a little bit easier when you’re explaining it to people.”

He cites the example of a widow receiving income from her late husband's estate but unable to access the underlying assets, as they were left to his children. However, she had some savings of her own, which she could use with Lifetime to create a top-up income, without needing help from her own children.

“That was the perfect client for Lifetime,” Glennie says.

The advice here is general and does not constitute specific advice to any person.