Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 201

Managing for retirement income

What can Australia learn from the US as the focus in retirement savings moves from lump sums to income streams?

Treasury, in a discussion paper late last year, described the introduction of new retirement solutions as critical to lifting the living standards and choices of Australians while ensuring the superannuation system remains stable into the future.

With the government planning to enshrine in legislation an income goal for super, Treasury wants to hear from the financial services industry and others by 9 June 2017 about what these comprehensive income (or ‘MyRetirement’) products might look like.

In its discussion paper, Treasury suggested that a MyRetirement product ideally should provide a balance of inflation-adjusted income, risk management, and flexibility.

“Studies typically show that individuals want to maximise their retirement income while managing longevity, inflation, and investment risk and ensure they have sufficient access to their capital for lump-sum withdrawals or unexpected expenses,” the paper says. “Individuals are rarely willing to trade off one retirement objective for another.”

Treasury also highlights the importance of communication, allowing consumers to make meaningful comparisons between different products based on outputs (income, risk, and flexibility) rather than inputs (nature of the underlying component products).

Learning from the US

Many of these questions are being grappled with in other developed economies as governments seek to manage ageing populations and increasing pressures on already-strained public finances.

Like Australia, the US has a mature defined contribution framework and, through the contributions of such thinkers as the Nobel laureate Robert Merton, it also has been looking at how to shift the focus of the system from lump sums to retirement income streams.

“The risk and return variables that now drive investment decisions are not being measured in units that correspond to savers’ retirement goals and their likelihood of meeting them,” Merton says. “Thus, it cannot be said that savers’ funds are being well managed.”

Global asset manager Dimensional, where Merton is resident scientist, has been prominent in the US discussion about retirement income goals. During a recent Australian visit, Dimensional’s Senior Researcher, Massi DeSantis, told local fiduciaries that retirement solutions should help workers grow their assets but also plan the consumption that their portfolios will be able to afford in retirement.

Within this framework, Dr DeSantis cited three key elements:

  1. Risk management that addresses the risks relevant to retirement income
  2. Asset allocation that balances the trade-off between asset growth and income risk management
  3. Meaningful communication that enables fund members to monitor performance in income units.

Risk management around longevity and markets

The first consideration regarding risk management is how long the members’ accumulated savings are expected to support their consumption in retirement. That challenge is growing by the year. In Australia, the average life expectancy of a 65-year-old is 86 years, according to the federal government’s Institute of Health and Welfare. By 2054-2055, the number of Australians aged 65 and over is projected to more than double, with one in every 1,000 people to be aged over 100.

De Santis said that, to account for uncertainty about life expectancy, a five-year buffer can be added to the average retirement horizon, resulting in a 25-year expected withdrawal period, assuming people retire at 65.

The next step is to identify the key drivers of income uncertainty over that withdrawal period, defined in terms of market risk (uncertainty of future stock and bond returns), interest rate risk, and inflation risk.

These risks can be reduced by computing the duration of retirement income streams and allocating to a portfolio of inflation-protected securities that are duration-matched to the planned retirement horizon.

“This framework also helps to manage sequencing risk, as the level of retirement income that can be supported by the allocation to risk management assets is not very sensitive to market risk, interest rate risk, or inflation risk,” Dr DeSantis said.

Asset allocation: growth assets versus risk management assets

Having identified an appropriate risk management strategy, the asset allocation question becomes a trade-off between allocating to growth assets versus risk management assets. The higher the allocation to the risk management assets, the lower the expected volatility of retirement income.

Dimensional in the US recently helped S&P Dow Jones Indices develop an indexing approach to managing the uncertainty of retirement income. The S&P Shift to Retirement Income and DEcumulation (STRIDE) index series uses this framework to seek to grow members’ savings while managing retirement income uncertainty.

“This entails a focus on asset growth early in members’ lifecycles with a transition to an income-focused strategy over time,” Dr DeSantis said. “As participants transition into retirement, the majority of their assets are invested in inflation-protected government securities matched to their retirement horizon.”

Because this is a liquid investment strategy, it provides members the flexibility they need should they require periodic withdrawals in retirement.

Meaningful communication

The third element in the suggested framework for a retirement solution is that it should also allow superannuation fund members (and trustees) to monitor progress toward the retirement income goal. This can be achieved through information that translates the purchasing power of members’ account balances in terms of estimated retirement income.

In the US, the STRIDE indices include a monthly cost of retirement income called the Generalised Retirement Income Liability (GRIL) for each retirement cohort, which can be used to translate account balances to estimated retirement income. (GRIL is defined as the present value of $1 of annual inflation-adjusted income over 25 years starting at the target date. The interest rates used to discount these future hypothetical cash flows to the present are derived from the current US TIPS curve.)

If the GRIL rises, generating a given level of income becomes more costly, and the purchasing power of a given level of savings goes down. If the GRIL falls, the desired monthly income becomes less costly and the purchasing power of savings goes up.

Because of the risk management framework underlying the indices, uncertainty about members’ future income is reduced over time so that communication in income units can be more meaningful.


Jim Parker is a Vice-President and Regional Director, Communications for Dimensional. He adapted this article for Australian audiences from ‘Next Generation Retirement Investing’ by Massi DeSantis and published by S&P Dow Jones Indices in its publication ‘Indexology’.


Leave a Comment:



100 Aussies: five charts on who earns, pays and owns

Retirees facing steep increases for basic items

Super is delivering for people about to retire


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.