When Retirement Reality Bites

Ross Mitchell, Niall Fitzgerald – Zurich Life Assurance plcDr. Virginia Stewart - UCD Michael Smurfit School of Business

2 June 2016

The views expressed in this presentation are those of the

presenters and not necessarily of the Society of Actuaries in

Ireland nor the respective employers

Disclaimer

Perception v reality?

Agenda

Psychology of retirement

Global retirement structures

Ireland focus A call to action

Psychology of retirement

• Life Stage• Broad Phases

– Planning – Decision– Transition and

Adjustment

Defining Retirement

6

• Individual• Job and Organisational

Factors• Family Factors• Socioeconomic Context

Antecedents that Influence the Process

7“Psychological Research on Retirement”

(Wang & Shi, 2014)

• Resources– Financial– Physical– Cognitive– Motivational– Social – Emotional

• Total capability

Ease of Adjustment

8

• Unemployment• Demanding job• Voluntariness• Retiring earlier than planned• Health reasons• Marital happiness

Well Being During Retirement

9

• After transition and adjustment– 70% minimum changes– 25% initial negative changes

but improved– 5% positive changes

Well Being During Retirement

10

“Profiling retirees in the retirement transition and adjustment process” (Wang, 2007; U.S. Health and Retirement Study )

Psychological Well Being During Retirement

11

“What Factors are Associated with Change in Older People’s Quality of Life?”The Irish Longitudinal Study of Aging

(2009-2011 and 2012-2013)

Outcomes

12

PhysicalFinancial

Psychological

Example: Imagine that the interest on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy:• More than, exactly the same

as, or less than today with the money in this account?

• Do not know or refuse to answer

Why Financial Literacy Matters

13

Gender & Financial Decision Making

14“Financial Literacy and Financial Decision-Making in Older Adults”

(Lusardi, 2012)

Age & Financial Decision Making

15

“How does age affect financial decision making?”Center for Retirement Research

(Gamble, Boyle, Yu, & Bennett, 2015)

Financial Isolation

16

PhysicalFinancial

Psychological

Global retirement structures

The global picture

• TTE Structure

• Complete Freedom

• Semi-Mature DC Market – 24 Years

• Household Debt Accumulation encouraged

• Net Effect = 0%

The global picture - Australia

• Tight -> Loose

• Pension Freedoms

• Immature DC Market

• Innovation

• Fraud Increase

The Global Picture - UK

20

• Product Drawdown

• Advanced – Similar to Ireland – Annuities and Drawdown

• More ability to mix and match

• Semi-Mature DC Market

• Innovative – QLAC

The Global Picture - US

21

Results

• (Schaie, K. W. Intellectual Development in Adulthood: The Seattle Longitudinal Study. Cambridge Univ. Press, Cambridge, 1996).

Lessons to be learned

• Open yet restrict

• Research and examine lifetime investment strategies - not just pre and post retirement

• Simplification = One Product

Lessons to be learned

Ireland focus

Income trends – Ireland

Source: TILDA pension report 2012

CSP NCSP OP PP SW Total0

5000

10000

15000

20000

25000

13,244

20,571

Income sources

Females incomeMales income

€ P.

A.

CSP – Contributory State PensionNCSP – Non-contributory State PensionOP – Occupational PensionPP – Private pensionSW – Social Welfare

Income trends – Ireland

A mainly defined benefit

world for current retirees

Level pensions “the norm”

Expected periods from

age 65 of 17.7 years for males and 20.6 years

in 2012

29%

Not on track to maintain

standard of living post retirement (McKinsey Retirement Readiness,

2015)

Expenditure trends – Ireland

19.90%

4.80%

4.90%

6.00%

11.00%2.00%3.90%

14.80%

32.70%

% of expenditure

FoodAlcohol/TobaccoClothing and footwearFuel and lightHousingHousehold non-durablesHousehold durablesTransportMiscellaneous goods and services

Source: Household budget survey CSO 2009Average of €26k p.a. for retired household with average age 72

An expenditure analysis

Variable Cost

Essential

Fixed Cost

Discretionary

Food

Alcohol/Tobacco

Clothing/Footwear

Fuel/Light

Housing

Housing durables

Housing non-durables

Transport

VacationsMedical costs

Entertainment

Subscriptions

Insurance

Pensioner lifecycle

30

Active(65-74?)

Passive(75-85?)

Supported(85+?)

DISCRETIONARY/VARIABLEFIXED/ESSENTIAL

Debt repayment?

Vacation(s)? House improvements? Family/

HobbiesHouse down size?

Healthcare Nursing homes

Inheritance

2050 Potential differences?

31

Retirement age?

Extended working

Defined contributio

n “new” world?

Private healthcar

e a luxury?

Greater funds

available for

drawdown?

Expected periods

from age 65 of 25 years for

males and 27 years

Second home?

A call to action

Summary

Lack of accurate data on (semi) retired population

Holistic view of physical, psychological and financial needs

Advice needed throughout WHOLE retirement journey

At and during retirement structures need radically improved

Recommendations

Adequacy and coverage of future DC world needs addressed NOW

Dedicated pensioner data collation service to drive appropriate products and services

Improved, clearer advice service AT and DURING pensioner lifecycle Cashflow modelling Life expectancy modelling Power of Attorney

Recommendations

Product innovation and flexibility Voluntary OPTION to set aside funds for private

healthcare? INDEXED annuity to “match” inflationary “fixed”

expenditure (transferable or convertible to lump sum in the event of nursing home care)?

SIMPLER drawdown vehicle for discretionary variable spending

Formation of retirement communities – “Retirement Crowdfunding”!

Questions