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:



Retirees facing steep increases for basic items

Super is delivering for people about to retire

When the $1.6m cap is no longer relevant


Most viewed in recent weeks

Three steps to planning your spending in retirement

What happens when a superannuation expert sets up his own retirement portfolio using decades of knowledge? He finds he can afford much more investment risk in his portfolio than conventional thinking suggests.

Finding sustainable dividend stocks on the ASX

There is a small universe of companies on the ASX which are reliable dividend payers over five years, are fairly valued and are classified as ‘negligible’ or ‘low’ on both ESG risk and carbon risk.

Among key trends in Australian banks, one factor stands out

The Big Four banks look similar but they are at fundamentally different stages as they move to simpler business models. Amid challenges from operating systems, loan growth and neobank threats, one factor stands tall.

Why mega-tech growth are the best ‘value’ stocks in the market

They are six of the greatest businesses ever and should form part of the global portfolios of all investors. The market sees risk in inflation and valuations but the companies are positioned for outstanding growth.

How inflation impacts different types of investments

A comprehensive study of the impact of inflation on returns from different assets over the past 120 years. The high returns in recent years are due to low inflation and falling rates but this ‘sweet spot’ is ending.

Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.

Latest Updates


Retirement income promise relies on spending capital

The Government has taken the next step towards encouraging retirees to live off their capital, and from 1 July 2022 will require super funds - even SMSFs - to address retirement income and protect longevity risk.


How retirees might find a retirement solution in future

Superannuation funds need to establish a framework that offers retirees a retirement income solution that lasts a lifetime. It will challenge trustees to find a way to engage that their members understand and trust.

Investment strategies

Dividend investors, your turn is coming

Dividend payments from listed companies, depended on by many in retirement, have lagged the rebound in share prices over the past year. Better times are ahead but sources of dividends will differ from previous years.

Investment strategies

Four tips to catch the next 10-bagger in early-stage growth

Small cap investors face less mature companies with zero profit that need significant capital for growth. Without years of financial data to rely on, investors must employ creative ways to value companies.

Investment strategies

Investing in Japan: ready for an Olympic revival?

All eyes are on Japan and the opportunity to win for competing athletes. After disappointing investors for many years, Japan is also in focus for its value, diversification and the safe haven status of its currency.

Fixed interest

Five lessons for bond investors from the Virgin collapse

The collapse of Virgin Australia not only hit shareholders, but their bond investors received between 9 and 13 cents in the $1. A widely-diversified portfolio can tolerate losses better than a concentrated one.

Investment strategies

The 60:40 portfolio ... if no longer appropriate, then what is?

The traditional 60/40 portfolio might deliver only 1.5% above inflation in future without diversification benefits. Knowing an asset’s attributes rather than arbitrary definitions is better for investors.


Two factors that can transform retirement investing

Retirees want better returns but they have limited appetite to dial up their risk exposure in order to achieve it. Financial advice and protection strategies in portfolios can enhance investment outcomes.



© 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.