Financial Planning your super for a specific retirement date

Target retirement date Image: pakorn /

Is it reasonable to alter your mix of investments as you get closer to retirement? Is setting your retirement date as an "end point" in your retirement investment planning the logical thing to do and would it suit the bulk or those planning for their retirement? (Image: Pakorn/

The world’s largest manager of fixed income funds – PIMCO – think it is. Here is an article from the New York Times, in which a spokesperson for the fund lays out the details behind a new retirement fund that they are running. It’s worth reading, as you will find more and more and more advertisements for this type of idea over the next few years, as marketing departments seek new ideas to target a community that is more concerned about risks.

New York Times – PIMCO retirement funds are built for skittish times

It is worthwhile reading the entire article, as it raises a lot of the issues that should be considered when looking at retirement investment processes.

Basing your super on a target date

This has been tried before, of course. After all, few ideas are truly new or unique – it’s just that marketing departments like us to think that they are. The PIMCO product mentioned in the NY Times article is an example of this. PIMCO suggest it is a new product, yet the fund manager MLC offered a “Maturing Discretionary Account” as a standard option in their superannuation funds many years ago. i remember this because way back in the 1980’s  i occupied the position of Superannuation Manager for MLC in Western Australia. The 1987 sharemarket crash caused huge drops in many people’s retirement savings, and the Maturing Discretionary option was an idea to tackle that problem.

This is how it worked… You started with a standard managed/balanced/discretionary fund mix of shares/property/fixed income and cash investments. This resulted in a gradual change in allocations to more conservative areas as retirement approached. In other words, the fund manager automatically locked in your expected retirement date as a target time for adopting a very conservative mix of investments. The logic of it all was highly compelling. A professional fund manager made changes each year to the benchmark allocations of your superannuation, resulting in a gradual movement from a “discretionary” mix to what amounted to a cash and fixed income mix. You, the super fund member, only had to focus on stashing enough money away to make sure you were building up a big enough nest egg.

The PIMCO product is basically the same idea, with a wider mandate to include put options and hedging strategies.

Did it work? Will it work?

The idea did work, in that the manager reduced the amount of money allocated to shares and increased the amount allocated to bonds and fixed income investments as retirement approached. For those who weren’t really looking at their super, it was a great idea.

However, all is not as obvious as it seems. The idea may have worked but the popularity of the option faded in the face of lifting markets. As the sharemarket rallied, many people became disenchanted with the long term plan when presented with its short term outcomes. It’s ok to ‘stay the course’ when you see other funds returning considerably more than yours in a given period or two – but when it becomes a matter of year-after-year, the average person’s patience begins to wear thin. That is when people begin to look back at their solid, conservative approach to money over the past years and begin to wonder whether they may have been too conservative?

In other words, the idea did work but it was a product made for a particular time and a specific set of conditions. When those conditions change, the product will usually not look at suitable. In addition, attitudes change over time. A more conservative idea may sound great a few years into a recovery from a global market crash but that same conservatism will be seen in a completely different light if markets continue to recover.

You see, this is where the things we say we want are often different from the things which we actually do. In other words, many people say one thing about their approach to investment and yet will act in a completely different way. The other point here is that what we want will change over time. Our preferences and priorities are a moving target – they are not fixed forever.

Here’s an example…

Many people rank themselves as highly conservative in their approach to investments yet when i look at their financial position, many of these same people will hold as their primary investment asset a single residential property, with an associated mortgage. They may have a bit of cash and a few shares but the bulk of their money is in one or two properties. There are a lot of reasons why the myth has evolved that this is a conservative thing to do – but the reality is that this is a particularly aggressive investment process. Even if we grant that residential property is a conservative investment, the manner in which you use it in your own finances could quickly make the actual investment very aggressive. Alternatively, a person may note themselves as “conservative” and yet their personal investments outside of cash are mainly held in a mix of speculative shares.

And so there will be people who will say that they want a conservative investment process but their past actions suggest anything but a conservative approach to risk and returns. These same people will often get itchy and uncomfortable if they see that their investment performance drags too far behind the figures they see reported by other options. Quite often, they will measure the performance of an investment in completely different terms to those used by the manager of the specific investment and this can lead to the disenchantment that stops targeted retirement date funds from being as fully effective as they could be. For example, people may look at their super earning 5% and compare it with their home or rental property that has doubled in value in 6 years. If the sharemarket rallies and starts to pump out 10% returns then it is often only a matter of time before the “targeted retirement date” super fund option begins to look too conservative.

It’s not usually the investment itself that falls down, it’s usually the individual’s approach to and expectations of, that investment.

You’ve got to be kidding Michael?!

When you focus on long term outcomes, your fundamental assumptions will often end up being contrary to current wisdom. When we look back at the last 10 years, we can see that an investment in international shares would most likely have earned nothing in those 10 years. An investment in Australian shares would most likely have earned nothing in the last 5 years. “Conservative” investors who held money in listed and unlisted property trusts are, on average, down considerably on their initial investment. Cash is king and term deposits are the emperors of finance. So it seems a mockery that i should suggest anything about “long term processes” or “it’s not usually the investment itself that falls down” and the like. From this point in time, it would appear that broad financial planning as it applies to investments, is falling short of what it should be. i completely understand how it would seem to be the case.

However, those of us who have watched booms and busts over a longer period see that patterns of behaviour are often associated with particular times in changing market cycles. As we have seen from previous posts, the bulk of financial planning investment strategy has failed to provide the best return in the recent past. That is almost an expected outcome at this point in the cycle. It does not invalidate advice given but it does bring into sharp relief any timing issues that may exist. Hence our discussion on setting investments towards particular dates of retirement.

What is your risk profile?

My point here is that we really need to spend a lot more time pondering and musing upon our own personal views of money – what we want from it and how we will deal with it. In financial planning terms, this is referred to as a “risk profile”. That is, a picture of your approach to the risk/return equation, and how your needs, objectives and personality all interact to make a particular investment approach suitable or not suitable for you.

There are many online calculators available for working out a “risk profile”. Most are fundamentally flawed. They tend to be written from the point of view of a business that is offering you a range of investment options, and therefore the objective is to use your answers to direct you to one specific option out of the range available.

This sounds fine – but the reality is that we human beings are a rather diverse lot. There may be ten thousand copies of a particular shoe sold in the shops of Perth, and yet each person who buys those same shoes will mix and match their clothing and accessories around that exact same shoe style in a completely different way. In our superannuation example, it may help the institution which is delivering the product or service to offer a range of options and to direct you to the “most suitable” for you based on your answers to one of these risk profile surveys. This does not necessarily mean that it is the best idea for you! The outcome that most suits your circumstance, preferences and objectives may not even be represented by any of the options available through that institution. This is often the case in the world of superannuation.

Here’s an example...

A lot of argument and debate surrounds the issue of “default funds”, and investment choice. You could use one of the online calculators to help you decide on the likely mix of investments that best suits your preferences. When you answer the questions it will direct you to this or that option. However, if you were presented with the full range of options available through a range of institutions – you may not invest into that particular super fund at all! For proof of that we need only look at the very large amount of money currently held in “self-managed” super funds. When presented with a full suite of options, many of these people chose one that would not be available in the average risk profile/fund matrix. When setting up their own fund they often end up with a mix that would not be available as an option in a ‘standard’ super fund, so risk profile measurements linked to particular products should be assessed carefully.

This is not to say that it is inappropriate to try to measure or assess your “risk profile”. It is a legislative assumption that you and your financial planner will do this. There is a large body of robust academic research that suggests that even an average risk profile analysis is going to be valuable. What it does mean is that such risk profiles should be used as simply one part of the overall process if identifying what is right for you, and should not be seen as the be-all-and-end-all of the investment selection process.

Should you target your asset mix with your retirement date?

This is the key question being posed. We truly are all individuals, and there is no definitive answer for everyone. Here are a few of the issues that should be pondered when trying to work out the answer to this question:

  • Do you really know the actual date that you will retire?
  • If you do know your retirement date – is that also the date you will start to access some of the money from your account?
  • When you do start to access your account, will you be taking a lump sum of money out?
  • Do you know what level of income you will want from your super? Do you know whether it is likely to vary and by how much?
  • Will your expected retirement income be greater than the income earned in your super? In other words, will you be taking some of the capital from your account to meet your retirement spending needs?
  • How often will you review the position of your superannuation account?
  • How will you decide the right time to make changes to your strategy?
  • Are you prepared to deal with lower returns if markets turn? Now be honest with yourself about this one – it’s easy to say yes when the world looks perilous but once the backyard barbecue conversations move back to who has bought the latest rental property or who has just made a killing buying some unknown company’s shares, how will you view lower returns?
If we go back in time to 2005 then yes, it would have been a great idea for those looking to retire in 2010 to have moved to more conservative investments. I understand this, and accept that my comments can look rather ridiculous in the light of the current investment market “mood”. However, if we look at those retiring in 2016 we may find that those who moved to more conservative investments missed out on one of the largest rallies of recent memory. I’m not actually suggesting that this will happen – i’m just pointing out that we cannot do our financial planning in the rear vision mirror. We have to look forward, and using what we have seen of the past, try to differentiate the various future outcomes that are more likely or less likely to transpire.

But isn’t this just what financial planners do anyway?

Good point Michael… Yes it is. Financial planners aim to work through the most suitable investment areas while looking at a large range of criteria. To some extent, they are using a target retirement date when doing all of these things.
There are a few differences though. Financial planners usually operate on an ongoing relationship basis with the people that work for. This is not always the case but it is the usual case. Therefore, someone working with a planner will fairly regularly throw all thoughts up into the air and see how they land in an ever changing environment. This is quite different to simply handing your money over to one operator using one strategy for potentially thousands of people. Financial planning is based on the idea that “we are all individuals”. Now i know that some of you are going to remember Monty Python, and put your hand up to say “i’m not”… but Brian was basically right that we must all make an individual choice of what suits our individual positions best. If that happens to equal a “one size fits all” package then that’s great!

In Conclusion

Superannuation and retirement planning can be as simple or as difficult as you want it to be. Hundreds of thousands of super fund members are happy to simply pay money into their fund and throw the annual reports into a corner. These people aren’t really that fussed about where there money is, who is looking after it or how.

Financial Planners on the other hand, are interested in every aspect of retirement planning, and will consider a large range of factors when pondering funding for retirement. They will tend to poke and test and balance up a far greater range of options than most super fund members would get around to themselves, if left unassisted. Sometimes an elegant solution like a targeted retirement date fund will be the best answer. Sometimes not.

I quite like the idea but experience tells me that such processes have a limited lifespan. We are in a “post crash” period, in the middle of a faltering recovery. At such volatile and difficult times the idea of a simple, hands-off answer can be attractive. However, funds such as those mentioned in the New York Times article tend to be more expensive, and set themselves a higher hurdle of performance just to keep up with lower cost and more market exposed funds. Some of the underlying causes for worry and conservatism that are around at the moment relate to “outlier” events (such as Greece defaulting or the US having to deal with spiralling interest rates). If a person adopts a cautious approach on the basis of these events then the steps required to deal with them will not lead to a prepackaged option such as the ones discussed here. Why? Because any of those very large events occurring will result in outcomes so unpredictable that even cash would be brought into question. Still, marketing departments are the same now as they ever have been, so i would expect these “ready-made” packages to reappear throughout the Australian super market in the near future.

It will be interesting to see if history repeats itself.



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