Endgame: managing superannuation in later life

We come up with strategies for improving superannuation advice to the elderly. Our project applies recent advances in financial economics and econometrics to issues raised by financial plans and fee structures.

The background to our project is the continued growth in financial planning as the baby boomers move towards retirement. Funds under Australian advice exceed $515 billion, or around half a year’s gross domestic product. There are around 750 advisory groups, 7850 financial planning practices, and 18,000 financial planners. There has been ongoing vertical integration within the industry, as small practices enter into sponsorship relationships with the big four banks and the major insurance companies. Around 80 per cent of financial planners are sponsored.

Take the question of allocating assets between growth assets (shares and property) and safe assets (eg term deposits). The dominant asset allocation strategy in the Australian industry can be described as an aggressive constant-mix: between 70 per cent and 90 per cent of an investor’s portfolio is placed in growth assets, even in the case of people just entering retirement.

We find that lifetime “glide paths” for people of middle means should instead resemble a displaced V: the share of growth assets should fall by something like 20 to 50 percentage points over working life, then another 5 or 10 percentage points on the day of retirement, but should subsequently rise through retirement, by something like 20 to 30 percentage points.

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