The certainty conundrum

19 April 2022

Money & Life team

Money & Life contributors draw on their diverse range of experience to present you with insights and guidance that will help you manage your financial wellbeing, achieve your lifestyle goals and plan for your financial future.

A goal all advice clients share is having greater certainty in their financial future. Iain Jeffery CFP® from Wealthpoint Financial Planning and Adrian Stewart, CEO Allianz Australia Life Insurance Limited discuss with Miriam Fine the challenges of delivering advice to retired clients in an increasingly uncertain world.

While clients have specific goals they want to achieve across all aspects of their finances – from saving for their first home deposit to planning the most tax-efficient way to transfer wealth to the next generation – certainty is an overarching goal throughout the advice journey. In fact, research has shown that greater certainty is perhaps a more important goal for clients than simply seeing their savings and investments grow. Having more assets than liabilities is bound to be satisfying. Yet it’s their sense of security that can actually be more important than the dollar value of their wealth.

The value of certainty

“A wealth of research points to the fact that financial certainty or security has great benefits for people,” says Adrian Stewart, CEO, Allianz Australia Life Insurance Limited. “Interestingly, Dan Buettner, longevity researcher and author, found that financial security, that is, having certainty in our financial position, has a three-times greater impact on our happiness than just receiving an income.”

Dan Buettner’s concept of certainty being of greater value than simply having more wealth builds on utility theory and the concept of loss aversion which were both popularised by Daniel Bernoulli in the 18th century. According to the Swiss mathematician, people are generally willing to forgo some financial gain to be certain of a known outcome. For example, given the choice between a gamble that could earn them as much as $200 or settling for a guaranteed $150, the majority of people would take the second option.

A focus on objectives

With this observation in mind, it makes sense that the role of the financial planner has evolved substantially in the last decade or so. The advice process has moved away from a quantitative focus – targeting a specific level of investment returns for example – towards an objective-based approach.

In the retirement phase of the advice journey, this approach becomes even more important because the degree of loss aversion experienced by people in retirement is considerably higher compared with the average individual. They are likely to feel the pain of a loss 10 times as much as they feel the joy of a gain, whereas for the average person the pain of loss is twice the joy[1]. This element of the retirement experience makes the certainty factor even more important for clients during this life stage. As a result, financial planners have an even greater opportunity to deliver the certainty their retired clients seek by defining objectives and then working backwards from these to give them confidence that the financial means to achieve these goals is in hand.

“Often retirees have a picture of what they want their life to be like in retirement, not what their account balances or income levels will be,” says Adrian. “The benefit of having a financial planner in retirement is that they can ensure the financial support required to achieve those non-financial retirement goals is in place. As a simplistic example: if a retired client says my goal is to pick up my grandchildren from school three times per week, the planner will build a financial plan that allows for the car, the insurance, the petrol, the maintenance and all the other costs associated with turning that goal into a reality.”

Securing quality of life

Looking to the future in retirement with a sense of security and optimism doesn’t only rely on financial resources. In the first ‘active’ phase of retirement, adjusting to life without the routines of working life has been shown to increase the risk of depression by around 40%[2]. But in this age group, there is strong evidence to suggest that financial concerns play a significant part in this decline in their mental wellbeing. Research from National Seniors Australia found that 60% of 50-70 year old’s surveyed worry their savings won’t last the distance. This scarcity mindset can often lead retirees to live far more frugally than they need to, limiting their opportunities to enjoy their time after leaving work.

“All the behaviours described in the Government’s Retirement Income Review – hesitance to spend the nest-egg, leaving unintended bequests or even making suboptimal investment choices in times of market volatility – all point to the fact that certainty is the key to a better retirement.,” says Adrian. “The solution, therefore, is for the industry to adopt an outcome-focused approach.  We should be aiming to increase the probability of successfully achieving a client’s retirement goals, whatever they may be.

“If you give people the certainty that their financial objectives are guaranteed to be met – that is, they will not run out of money, or they will not have to downgrade their lifestyle or spend less while share markets recover from a downturn – they can get on and live life and do the things that please them in retirementtoday. That’s the power of a financial planner, the ability to take a client’s individual goals and objectives and ensure that they are financially viable. To give the client certainty that those non-financial outcomes can be achieved.”

Few guarantees in life

However, Adrian qualifies this with the caveat that financial planners are not in a position to offer clients cast iron guarantees for either their financial objectives or retirement goals. “Planners are rarely in a position to “guarantee” outcomes for clients,” says Adrian. “As a result, we often see incomes reduced, lifestyles tapered, and uncertainty rising. Historically, it’s been an accepted cost of retirement planning, but now planners, clients, and the government with the introduction of the retirement income covenant, are all demanding more.”

This is a view Iain Jeffery CFP®, founder and financial planner at Wealthpoint Financial Planning in Canberra, wholeheartedly agrees with. “The word guarantee can never be used in a financial planning conversation,” he says. “Whether it’s how much clients will earn from their investments or how much they will spend in a given year, we can’t be 100% sure the numbers will line up as expected.”

‘But clients generally aren’t looking for certainty around the amount of money they need, either as capital to invest or income,” he adds. “What they need from financial advice is reassurance that no matter what happens, they will be OK. The concept of certainty in financial planning must be balanced with the knowledge that many things will change during any client’s retirement journey – whether that’s fuel costs rising as they are now, or a major market correction like the one we saw during the GFC. It’s part of my job to explore what this might mean for their financial plan, in terms of both income and spending.“

New challenges, new solutions

As Adrian highlights, the deck has become stacked against planners and their clients in recent times when it comes to the income side of the certainty equation. The shifting landscape of both financial advice and global markets have made it far more challenging to secure the financial outcomes necessary to support clients’ retirement objectives.

“Economically, financially, behaviourally, even demographically, planners and clients face substantial challenges and more significant uncertainty,” he says Adrian. “With people living longer than ever before, creating stable and sustainable income streams throughout retirement is an uphill battle.

“In Australia, we have one of the leading defined contribution pension systems globally, ensuring people retire with as much money as possible,” he adds. “Unfortunately, one of the costs of this system is that all investment and market risk sits with the retiree. That doesn’t lead to much certainty. With that framework as the foundation for advice and product development, providers have not prioritised certainty.

“Increasing the probability of successfully achieving a client’s retirement goals requires a concerted effort from a wide range of solution providers to ensure the superannuation ecosystem supports a greater degree of certainty. The tools, calculators, advice, technology, platforms and superfunds all have a critical role to play. It’s not an easy task, but progress is being made at an increasing rate, and this year, with the retirement income covenant and new retirement solutions coming to market, will be another leap in the right direction. We can and should be offering guarantees as a baseline level of certainty in retirement”.

The pros and cons of modelling

Unlike a client’s asset position, their income and spending and how these will change over time during retirement, their certainty cannot be measured and as such it can be hard to pin down this essential element of their financial plan. Plus there will always be competing objectives in a financial plan. Offering a greater degree of certainty of one over another is often the choice clients are making, guided, in part, by their financial planner and the information they can provide based on modelling expected outcomes.

“Say a client’s number one objective is never having to leave their home and enter aged care,” says Iain. “That’s going to take a substantial commitment of assets to safeguard a sum they might need to fund care in their home for an indefinite period. At some time in the future, something might change in that clients’ circumstances leading them to reconsider the relative importance of that objective, triggering a review of their strategy and how those assets are to be invested.”

“Modelling is the primary tool we have to inform their choices and priorities when it comes to reviewing objectives, whether that’s their current spending level or their capacity to help a family member with their financial goals,” he adds. “We’ll be looking at that alongside the return they need to act on these choices. Outputs from models like the Monte Carlo simulation we’ll often use, offer a broad spread of outcomes to show clients the probability they’ll achieve their goals given certain levels of spending and investment return.

“We love to see 99% certainty from modelling. But even with that probability factored in, if we were to see negative returns for 10 consecutive years, spending levels might still need to change. Which is less of a challenge if there is a discretionary element, but far more of a problem for people already sticking to a modest budget in retirement. And conversely, if people are getting a higher return, this can create an opportunity for seeking financial advice on the maximum they can spend, without impacting their probability of achieving future objectives like leaving a bequest.”

Source: Deloitte, The Retirement Income Covenant Checklist, 2021

Adrian agrees with Iain that modelling and other new tools available to financial planners can be far more helpful in the advice process when they are anchored to client objectives rather than targets for income, capital preservation and growth.

“Recent technological advancements have meant that the sophisticated tools required to complete more complex calculations are becoming more readily available,” he says. “Using these tools, we can now measure the probability that a given investment approach will be able to achieve a client’s objectives. Then, with adjustments to either the objectives or investment strategy, we can quantify the increase in probability. This has the effect of measuring, and ultimately increasing certainty.

“This changes the client conversation and starts to shift your perspective of risk. The risk of not achieving the client’s objectives now becomes the focus, and the best solution for a client increases this probability of success and therefore, their certainty. People only get one retirement, and they don’t want to leave it up to chance. Thankfully, no one is more acutely aware of that than financial planners. Planners who can provide advice based on higher confidence levels are in a stronger position to create safer and more robust financial plans, and maintain confident and satisfied clients.”

Balancing risk and uncertainty

According to Craving Certainty – The Retirement Mirage, a 2015 Paper from Lonsec, “ambiguity aversion is the tendency to confuse uncertainty and risk. Much is still unknown about how people assess risk versus uncertainty, but in summary it describes the preference for risk (which can be quantified) over uncertainty (which can’t).” This statement sheds some light on Iain’s experience concerning his clients’ understanding of risk and certainty.

“Investing in something they’re familiar with like property is a step some clients will feel far more certain about taking compared with other growth assets,” he says. “I think their perceived certainty in how that asset will perform has a lot more to do with a sense of control than consideration of the risks involved. Unlike shares or managed investments, it’s an asset that’s tangible so it feels like they’re more in control of it, reducing their perception of the risks that do exist in property investment.”

While some clients are in a position to choose property as an investment, others can be facing down retirement without a home they own. According to Dr Martin Fahy CEO of the Association of Superannuation Funds of Australia (ASFA), this is far more likely to be the case if they’re city dwellers, with only 65% of Sydney residents achieving home ownership by age 60 compared to just under 80% for the rest of the country[3].

Renting privately has serious consequences for the finances needed to secure retirement objectives. According to ASFA Retirement Standard estimates, a single retiree renting privately in a one-bedroom unit in Sydney will need to spend $62,294 annually to achieve a comfortable retirement and a couple renting a two-bedroom unit will need to spend $81,997 a year. By comparison a single homeowner in Sydney needs around $43,787 a year while the figure is $61,786 for couples[4].

In Iain’s view, this is the one certainty his clients really do need to focus on. “If you’re going into retirement without a roof over your head, that’s a major concern,” he says. “In Australia there are few protections in the private rental market to give you certainty of staying where you are or knowing what your rent will be for the next 10 years.

“For clients of mine approaching retirement without a home they own, that’s their number one goal. We work out a strategy for them to make it happen, which could mean working longer or planning to relocate in retirement so they can afford to buy. When clients have certainty on this need, we can then turn our attention to securing funding for other objectives in their financial plan.”

[1] Gachter, Johnson, Hermann, Individual-level loss aversion in riskless and risky choices, 2010

[2] Institute of Economic Affairs, “Work Longer, Live Healthier”, May 2013,

[3] Renting in retirement? Here’s how much super you’ll need, Martin Fahy, Canstar

[4] ASFA, figures as at September 2019. Assumes retiring at age 65

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