Andrew Crawford - Director, Fiduciary Financial Services
Understanding the retirement income gap
Shelley Wettenhall: I'd like to welcome Andrew Crawford to the Third Pillar Forum. Andrew is the Director of Fiduciary Financial Services and has had 26 years of experience in financial services. Andrew has held senior roles at Credit Suisse and Deutsche Bank and Andrew was a co-founder of Snowball Financial Group, which grew to become one of Australia's largest independent financial advice businesses. Welcome Andrew, to the Pillar Forum.
Andrew Crawford: Thanks Shelley. Nice to be here.
Josh Funder: Andrew, you've had some challenging, radical and controversial approaches to how we get retirement funding right. Tell us what they are and how they might change the game for Australian retirees.
Andrew Crawford: Yeah. Thanks Josh. Yeah. So that's... Yeah. I've been around for a long time and seen a lot and I've formed my views of where I think there's some gaps and where we can... What we can do to remediate those. So yep, happy to go through those.
Josh Funder: What's the most controversial one? Where do you think we've got it most wrong and...
And launch forth, as I know you do. Don't be shy now.
Andrew Crawford: Yeah. Yeah. Okay. No problem. So look, as far as I'm concerned the industry that focuses on retirement outcomes is broken. It really survives primarily due to inertia and really fails to grasp the needs of most working Australians. So what I was going to do today is outline 10 realities in 10 minutes that I don't think have been addressed by the collective wisdom of the industry. Starting with one of the key framing issues is that the timing and the shape and the meaning of retirement is transforming. In the past it was viewed as a time to wind down. It was increasingly... Whereas now it's increasingly a time of new choices, new freedoms, new purpose and new challenges. More than ever, we're saying that retirement is far more than a destination. It's actually the beginning of a new journey filled with new twists and new turns as well as new possibilities and new questions. As it stands today, as far as I can tell, the current retirement planning industry met planning industry... Oh sorry. Current retirement planning methods and tools missed the mark completely. So I've got these 10 realities that I'd like to go through. The first reality is that the new retirement plan is not just about growing your nest egg. It has four inter-related ingredients for living well during life after work.
The first thing, being healthy and active, to be able to do what you enjoy. The second is spending time with family and friends who provide satisfaction, joy and purpose. The third is to provide purpose, to find activities that are meaningful and fulfilling, and also to have adequate finances to live how they want and provide the security for the unexpected. The second reality is that members are not engaged along their journey to get to where they want to be. We saw this with a Vanguard study last year called "How Australia Saves". 68% of members have no contact with their fund each year, 87% spend it in the default investment option, less than 10% make contributions. Clearly they're just not engaged. So reality three is that members are not motivated by nest egg projections. What they're more focused on is knowing they'll have the money, a fortnightly income to live off. We saw in the UK last year that engagement increased dramatically when they switched to reporting of weekly, monthly and annual income from superannuation with an estimate of your Age Pension entitlement. Reality four, projections are based on deterministic, not stochastic assumptions. This makes them unrealistic, possibly even misleading, and definitely not in the best interests of members.
Why? Because A, they lead to either an over or an under-estimation of the member's retirement liability, which causes either false hope or acceptance of failure. And two, the framing is wrong. Members want to know, "How much do I need to cover my needs, such as essential living costs and my wants such as discretionary costs?" They also want to know, "What is my likelihood of meeting both of these and not running out of money?" And then the other is, "Where will my income come from? How certain is it?" The reality is that 49% of retired Australian's main source of income is still government payments and largely the Age Pension. Number five, and this is a big one. The average retirement age isn't 65, it's actually 55.4. So what this means is the average Australian is going to have to fund nearly 30 years not 20 years in retirement, which has massive implications. Reality number six, standard deviation of life expectancy is actually eight years. It's not, everyone doesn't die at life expectancy. So this also has major implications to the length of a person's retirement. It could be 38 or 22 years. Reality number seven, retirement expenditure is based on health status and is not uniform during a person's retirement. In 2018, Milliman published their retirement expectations in spending profiles that showed expenditures just fell by 37% between early retirement and late retirement around 85-plus.
Reality number eight. Retirement funding in the real world is actually multifaceted. For the lucky few there are four pillars, but for most Australians there are really only three. And they are the Age Pension, superannuation and home equity. And for the lucky ones they've got the ability to draw down on term deposits, bonds, shares and investment properties they may have. Number nine and getting very contentious. The most important retirement strategy is to own the most expensive home you can afford outright, given the current tax environment. This is just rule one for anyone in their retirement plan. Lastly, reality 10. Financial advice is about marrying the members' needs with complex and changing rules. This is challenging to enable them to make better, more informed choices within the confines of post-Royal Commission regulatory landscape, that has relegated most members to becoming what I refer to as financial advice orphans.
And we see this is displayed with the results. Over 10 million Australians have multiple superannuation accounts. Only 12% received financial advice in the past 12 months and financial advice is still far too expensive. The FPA estimated this year that the cost of a financial plan is $2600, which is an increase of 10% on last year. And the cost of ongoing advice is about $3700 a year, which is up 12% from last year. So clearly what I've tried to show with these 10 factors is things just aren't working. And the scaremongering continues. You can see on this chart I drew from Canstar that it's all about not having enough money. The reality is, if I draw your attention to this person who's 40, they've got a balance of 56,000. They need 154 so they have a gap of 97. This is all about scare tactics. The reality is that there are other sources of income or pillars that they will try to use to fund their retirement.
Going on to the next slide. If we look at... If we recognise that there are actually three pillars for most people and four pillars for the lucky few, there are still some serious danger zones if we assume most people are retiring at 55. From that 56 to 60 period, there's a huge gap because they can't access the superannuation, they can't access the home equity and they can't access the Age Pension. Things get a little bit better at 60 when they can start to turn their superannuation into an income stream, but there still is a massive gap. And one of the only alternatives open for them at the moment is to use home equity to close that gap. Things get a bit better when the Age Pension kicks in at 67, but still there's is a little gap in there that... And there's not the capacity to handle any emergency that might come up.
So think to the... My point to this conference is that there is a retirement income gap. There are multiple pillars that will close that gap. But before we... We need to understand as an industry that people do use multiple pillars. Most only have access to three, but we've really gotta understand what that gap is in the first instance. And the way that we do that currently is not sufficient for the people to get them the retirement outcome they want. Which is actually not just about making money. It's actually much more multifaceted about people, health, purpose and also your finances.
Josh Funder: Andrew, straight out thanks. You've spoken truth to complexity and you've actually put our group here at the forum in the shoes of a retiree, the shoes of an Australian trying to navigate a system. I'd say there are some other ways to categorise those major statements. And we've heard this from other people here at the forum. Firstly, complexity is too great and understanding needs to be the focus of our system, not complexity. And we haven't done enough...
Andrew Crawford: Or guidance.
Josh Funder: And guidance. We've got a retirement savings system focused on accumulation, that is yet to turn its mind genuinely to pension phase and how to deliver. We've got an advice sector focused on the top 13-15% of people...
Andrew Crawford: Correct.
Josh Funder: Not delivering for the median or the normal retiree. We've got...
Andrew Crawford: And becoming more unacceptable by the day.
Josh Funder: That's right. We've got an advice outlook focused on sustainability. How can you take an adequate amount and stretch it out over 20 years?
Andrew Crawford: Correct.
Josh Funder: Not only that needs now to be 30-plus years for most people to plan if they live beyond average, which half of them will. But we have to focus on adequacy, not just sustainability to meet the needs of people who aren't plush with the fourth pillar.
Andrew Crawford: Correct.
Josh Funder: Private savings and investments. So take us through those three pillars that you mentioned. The radical advice, own the most expensive home you can on a tax basis. How do we get them working together so that that advice can actually then be the right place to live and the right way to fund retirement and not simply an inaccessible asset for the owners of the property, their children and grandchildren? How do we knit together a system that's less complex, that's more focused on normal people but can also bring to bear the three pillars of normal people's retirement throughout life.
Andrew Crawford: So I think, the way I see it is you have to come back to basics and understand what people want their retirement to look like. And it's not all about money. It's you go from working and you have 8 to 10 hours of your five days a week taken up by work. When you retire that presents a huge gap. What are you going to do to fulfill your life, to give you meaning, to give you some purpose, who are you going to do it with? And what are those activities that will make you happy, and then once you've got your head around what does the retirement you want look like, the next thing is, what are the basics you going to need to cover? You've gotta cover electricity, you've gotta cover food, and then you're going to need some little extras, do you want to go travelling. Once you've got an understanding of what that is, that's an important first step, and the next key thing is to take a realistic view of what is your health expectancy like. One of the things we do very well, is we enable people to project out how long will you be healthy and active for, when will you need some low care, when will you need high care and then when will you ultimately go into a retirement home, if that's what you choose.
Andrew Crawford: That frames how much that liability is, and then the questions are, well, what's that pathway from you today till that point when I want to retire, and how do I get there, and what are the assets that I'm going to use to fund it? One of the things we do that's very novel is we project the present value of a person's age pension entitlement, that gives them an idea of that pillar, but the pillar of superannuation is very hard to project unless you used the cascade modeling and say, this is the chances of this balance paying some out and this is what [14:10] ____ a periodic income. And then the last one, and that's where I think you guys are doing such a great job is using home equity. That's the unknown piece of this equation, but for many people it manifests itself as a retirement income gap, when actually there is a source of that that they're living in it. And I think their home is such a integral part of that retirement picture, to be in community, to be in an environment when their health is declining where they feel comfortable, and they have the support of friends and family and familiarity around them. I think it's integral to having a good retirement.
Josh Funder: Andrew we could talk a lot about your 10 or myth busting, and we've got some stuff on myth busting around retirement. It's a really important contribution. We will host your presentation on the Household Capital website, we will transcribe it because people really want to look down that list of 10, and that list of 10 will really help a wider range of Australians look ahead, not make decisions at a point of urgency, but really understand some of the fundamentals, not about finance, not about structuring things, but about what they want in life and how they can get it, it's a fantastic contribution. Thank you Andrew.
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