In our experience, the Australian funds management industry has largely adopted the Henry Ford “one size fits all approach” in that most fund managers don’t tailor different strategies for different types of investors. Funds tend to be run the same “Henry Ford” way no matter who the underlying investor is. Yet there are significant differences between retirees and other investors, including investors who are still in the accumulation phase of superannuation. Assuming retirees hold their investments within superannuation1, their investments are tax free and they receive rebates for franking credits. Another difference is that retirees need to live off the income stream from their investments, whereas accumulation-phase investors have no such objective. Finally, and probably most importantly, the risk tolerance of retirees is likely to be lower than for accumulation investors. Although an investor’s risk tolerance doesn’t necessarily change completely at retirement, the risks of investment sequencing risk peak around the time one retires. In this paper we will discuss these tax, income and risk differences and see how they affect the design of retirement products
This paper was presented in July 2014 at the 19th Melbourne Money and Finance Conference (MMFC), which explored the theme Current Issues in Australian Financial Markets.
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