While wealth transfer from one generation to the next is putting pressure on financial planning practices to attract younger clients, there’s no doubt that advice during the retirement years is still a mainstay of the profession. With draft retirement income covenant legislation expected to make its way through Federal Parliament by July 2022, there is a strong focus on creating a better framework to meet the financial needs of Australians during retirement.

The covenant is being introduced by the Government to “support retirees to have the confidence to spend their hard-earned savings, while enabling choice and competition in the retirement phase of superannuation.” However, a new study from Fidelity International and research firm MyMavins discovered that the time when people are likely to struggle most with their financial choices is in the pre-retirement phase. In this cohort, two in five people surveyed said they don’t feel financially prepared for retirement and lack the confidence in their finances to allow them to do the things they want and enjoy in life. This highlights just how important access to financial advice is for clients well before they exit the workforce.

Different perspectives on retirement

This primary consumer led research conducted in September 2021 was commissioned by Fidelity International and conducted by MyMavins. The findings add a fresh perspective to help financial planners better understand their clients’ experience on the retirement journey, even those with some years to go before they start spending super savings. It’s also a timely reminder of just how varied the journey through retirement can be for each individual. For financial planners, it provides evidence that its more important than ever to have regular touchpoints with clients both before and after retirement to demonstrate value and take time to offer support through each transition period.

“The research is ground breaking in a number of ways,” says Jason Andriessen CFP®, Consulting Partner at MyMavins. “It’s a quantitative study designed to gather insights from more than 1500 older Australians with the sample sizes necessary across four phases of retirement to really analyse their journey and experience over time. We’ve basically been able to replicate a 40-year longitudinal study in a couple of months.

“What we’ve discovered from the pre-retirement cohort tells us a lot about the level of uncertainty people are dealing with and how much they can benefit from financial advice as a result. Retirement is changing with most people looking to work longer – as many as one in two people plan to work past age 67 and nine in 10 want to transition into retirement over time. But we also know these plans don’t always work out and that many retire at a time not of their choosing. This can have significant consequences for both finances and wellbeing that last well into their retirement years”

What drives wellbeing

The new research identifies seven critical drivers of life satisfaction for older Australians. Emotional experience is the strongest driver of wellbeing, suggesting that it is also the best predictor of overall life satisfaction. The other important drivers are feeling confident and resilient, having purpose and meaning, a sense of control and connection with family and the community. Wealth and health are less important than all of these and are ranked sixth and seventh respectively.

The research points to lower levels of life satisfaction in people leading up to retirement across five of the key indicators – purpose, connection, control, confidence and emotional experience. Even if the retirement journey starts as expected, there are still complex emotions and unexpected events to deal with such as declining health and bereavement as well as the potential for financial struggles. Given these life satisfaction indicators generally rise as  retirement goes on, it suggests that people can develop better strategies for dealing with life’s curve balls and thrive in spite of them.

“We know the emotions around retirement are challenging even when we have a plan,” says Jason. “It takes on average two years to regain a sense of control when retirement hits. And while sudden retirement is shown to have a significant impact on wellbeing, it’s not the only surprise in store. Needing to downsize a home and having health issues or losing a partner – many of these things are not a matter of if but when. A financial planner can add value as these life events arise and a key finding from the study was that the earlier a client starts the advice relationship the better. Looking forward to retirement beforehand and feeling in control at the outset are strongly associated with being more satisfied in late retirement.”

“For me the surprising insight from this research is that life gets better as we move through retirement, and that the sense of positivity increases,” Jason adds. “So many of the late retiree cohort have changed course and had to revisit their strategy because of life events. One of the main tips they would give to their younger selves is to be adaptable and flexible. This also highlights the importance of an active relationship with a financial planner throughout the retirement journey.”

Richard Dinham, Head of Client Solutions and Retirement with Fidelity International was more surprised to discover which factors have the greatest impact on life satisfaction in retirement. In his view, health and wealth coming in last place says a great deal about the need for financial advice to be more holistic and focussed as much on resilience and empowerment for clients as wealth outcomes.

“When we look at drivers that are statistically more important to life satisfaction in retirement, emotional experience, confidence and purpose come out on top, followed by control and connection,” says Richard. “Wealth and health are important of course, but less critical in comparison and this gives us a different picture of what matters most on the retirement journey.

“From an investment perspective, having any plan is certainly important in terms of confidence and control. Having adequate buffers built into a plan can help people have the flexibility to manage changes that will come their way eventually and this can add to the quality of their emotional experience. They feel prepared now and find themselves better able to navigate uncertainty with a positive mindset when they reach the crossroads at the start of retirement or a crisis once retirement is underway.”

A supportive advice journey

A holistic financial planning and investment approach that takes into account more aspects of the retirement experience certainly pays dividends for satisfaction in the long term. The Fidelity Retirement research also shows that the more comprehensive the plans late retirees have made in the past, the more satisfied they are likely to be in the present.

A plan that prepares people emotionally as well as financially will have avoiding boredom and a sense of purpose in scope as well as aged care needs and funding travel. “Support for these many important dimensions of life satisfaction in retirement are right in the wheelhouse of financial advice,” says Jason. “Confidence and control are the more obvious outcomes from the whole advice process. But financial planners can help clients have positive emotions by helping them picture the future and feel optimistic about it. Talking in detail about what a client wants to achieve can help them find their sense of purpose beyond the work priorities that used to drive them forward.”

Even though financial planners may be comfortable and experienced including broader lifestyle matters as part of their fact find and advice process, for clients it may take time and regular check-ins to build the trust. Based on findings from Fidelity International’s The Value of Advice report from 2020, there is unlikely to be a one-size-fits-all approach that is effective in building trust in every client.

“If financial planners can recognise which of the four navigation styles their client leans towards, they can adjust how their approach to deepen trust and engagement.”

Informed and confident clients

Regardless of a client’s navigation style, they can all benefit from the peace of mind that comes from having a firm grip on their finances and confidence that the way they spend now doesn’t put their future spending at risk. To an extent this confidence comes from improving knowledge of their own financial behaviours and how to make better choices as a result.

“Clients don’t want to be educated but they want to learn,“ says Jason. “They can learn very effectively about what will work best for them financially by being involved in the decisions about their money. Planners can guide them through a co-creation experience, building their confidence by helping them understand the trade-offs they need to make. Using modelling software to showing them projected outcomes of changes in their spending and lifestyle decisions can help them test different life choices and the best and worst case scenarios they might be dealing with in future.”

“A retirement plan should anchor on clients having the confidence to spend rather than the capital they have to invest,” Jason adds. “That means the focus of conversations with clients should be on consumption rather than how much wealth they have or need. A plan that’s sufficiently flexible can give them comfort that even if unexpected things happen like a significant drop in the market or a major health event, their consumption needs may still be met. And even if they can’t, most retirees are adaptable and are willing to cut back on discretionary expenditure.”

Flexible income strategy is key

When it comes to spending with confidence, communication with clients on their habits and expectations is one side of the coin. An appropriate investment framework with contingencies built in is the other. “From an investment perspective, income layering is one of the most comprehensive approaches to retirement planning,” says Richard. “It’s a more complex strategy but it’s also more precise in targeting outcomes, enabling a planner to overlay consumption needs over decades with an individual asset/liability model.

“Using fit-for-purpose investments for retirement is another way of increasing certainty and confidence by reducing the roller coaster whilst still delivering the right kinds of outcomes for retirees.”

While this survey gives the financial advice profession food for thought on what matters to clients most in retirement, it’s important to acknowledge that many financial planners already provide an advice experience that aligns with these research insights. “A lot of financial planners are doing this extremely well already,” says Jason. “It’s clear that there is significant value realised from financial advice through all stages of retirement regardless of wealth and age. Advised Australians experience less financial stress in retirement and more confidence, competence and resilience plus they feel happier.”

Originally published by Richard Dinham Head of Client Solutions and Retirement, Fidelity