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Adoption of retirement income solutions needed earlier

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MEDIA RELEASE: An ultra-low interest rate environment coupled with increasing inflationary pressure is presenting significant challenges and means planning for retirement will need to start even earlier, according to American Century’s head of portfolio management for multi-asset strategies, Vidya Rajappa.

Ms Rajappa says the past 12 months have underscored the need for retirement planning to begin earlier, bringing forward the transition phase of retirement planning.

“The market crisis has highlighted the necessity of managing volatility in retirement and the importance of a well-designed retirement income solution.

“There has not been much traction in retirement income solutions over the last decade, owing to barriers to adoption such as fiduciary concerns, complexity, cost and portability, but that has since changed.

“Research shows that many people in their transition phase – the several years prior to actual retirement – are increasingly faced with earlier retirements than planned. Retirement has moved from being a specific date to a phased retirement over several years.

“On average, most people plan to retire at 65 years old; however research shows nearly half of all retirees retired earlier than expected, predominantly due to health reasons or workplace changes,” she said.

In addition to unexpected/early retirements, people can also diverge from their pre-planned retirement paths due to panic selling, for example.

Ms Rajappa said such changes in the 15 years before a planned retirement are particularly consequential, as people typically accumulate two-thirds of their total wealth throughout this period.

“It’s a period we deem the ‘transition risk zone’, and retirement strategies with a specific target date often come with a high degree of equity exposure that can inflate this level of risk.

“For this reason, a flatter, more risk aware “glide path” in this zone can help minimise transition risk. Having downside protection during these years better reflects actual risks and investment horizon many investors face. The idea that you set and forget your retirement allocation and stay fully invested until the time you think you’re going to retire is no longer a sufficient retirement strategy,” she said.

Ms Rajappa added that while there is no one-size-fits-all retirement strategy, the most appropriate is one that considers existing savings and wealth levels, risk tolerance, and any other plan-specific needs or objectives.

“Variations in risk tolerance, savings patterns and other demographic factors can lead to subtle differences in suitable glide path risk levels over an investor’s life cycle.

“A framework that balances these risks is more likely to generate attractive risk-adjusted returns and greater wealth accumulation at a time when investors need it the most,” she said.

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