An Optimal Retirement Default

Tracy Jensen, July 2013

What happens to your members when they leave?

VIDEO GOES HERE

HEADINGIt’s all about the goal

Options?What is the goal?

Income

Term

Affordability

Inflation

Longevity

Flexibility

Estate

HEADINGIt’s all about the goal

Options?What is the goal?

Income

Term

Guaranteed annuity Living annuityInflation-linked Portfolios:Low equity

Medium equityHigh equity

Fees: 1% vs. 3%

HEADING

Which annuity is best?

Framework

Assumptions

Retirement age: 65 years old

Male Female

Draw down: 6.5% 5.6%

Male Female

Life expectancy: 17 years 21 years

Set incomes equal

=

Compare term

HEADINGLiving annuity projection - Male

*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

HEADINGLiving annuity projection - Male

*Projection between 10th & 90th percentile*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

HEADINGLiving annuity projection - Male

*Projection between 10th & 90th percentile*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

HEADINGLiving annuity projection - Male

*Projection between 10th & 90th percentile*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

HEADINGLiving annuity projection - Male

*Projection between 10th & 90th percentile*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

Probability of living annuity doing better:Low equity 27%Medium equity 44%High equity 53%

Probability of living annuity doing better:Low equity 9%Medium equity 24%High equity 34%

HEADINGLiving annuity projection - Female

*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

HEADINGLiving annuity projection - Female

*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

HEADINGLiving annuity projection - Female

*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

HEADINGLiving annuity projection - Female

*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

HEADINGLiving annuity projection - Female

*Projection between 10th & 90th percentile Source: 10X Investments, Dimson, Staunton, Marsh

Probability of living annuity doing better:Low equity 30%Medium equity 56%High equity 65%

Probability of living annuity doing better:Low equity 6%Medium equity 28%High equity 42%

Fees of 1% pa

When is a living annuity better?

Low equity Medium equity High equity

Male

Female

Fees of 3% pa

Low equity Medium equity High equity

Male

Female High fees ruin your

retirement!

Low fees + high equity are optimal in a living annuity

Living annuities are better for females than

males

HEADING

Example using a 5% draw-down

Standard industry projection – no fees – no volatility

Industry projections lead to mis-selling

Source: 10X Investments, Dimson, Staunton, Marsh

HEADING

Example using a 5% draw-down

Standard industry projection – no fees – no volatility

Add in fees of 3%

Industry projections lead to mis-selling

Source: 10X Investments, Dimson, Staunton, Marsh

HEADING

Example using a 5% draw-down

Standard industry projection – no fees – no volatility

Add in fees of 3%

Add in volatility

Industry projections lead to mis-selling

Source: 10X Investments, Dimson, Staunton, Marsh

HEADING

Example using a 5% draw-down

Standard industry projection – no fees – no volatility

Add in fees of 3%

Add in volatility

Add in 80% confidence

Industry projections lead to mis-selling

Source: 10X Investments, Dimson, Staunton, Marsh

HEADING

What is your goal?

1.Income = 5% draw-down pre fees

2.Term = 25 years

10X Retirement Calculator: probability of meeting your goal

Source: 10X Investments, Dimson, Staunton, Marsh

HEADING

Fees of 1% pa:

Low equity: 35%

Source: 10X Investments, Dimson, Staunton, Marsh

10X Retirement Calculator: probability of meeting your goal

Fees of 3% pa:

Low equity: 5%

HEADING

Fees of 1% pa:

Low equity: 35% Medium equity: 60%

Source: 10X Investments, Dimson, Staunton, Marsh

Fees of 3% pa:

Low equity: 5% Medium equity: 30%

10X Retirement Calculator: probability of meeting your goal

HEADING

Fees of 1% pa:

Low equity: 35% Medium equity: 60% High equity: 75%

Source: 10X Investments, Dimson, Staunton, Marsh

Fees of 3% pa:

Low equity: 5% Medium equity: 30% High equity: 50%

10X Retirement Calculator: probability of meeting your goal

HEADING

Fees of 1% pa:

Low equity: 35% Medium equity: 60% High equity: 75%

Source: 10X Investments, Dimson, Staunton, Marsh

Fees of 3% pa:

Low equity: 5% Medium equity: 30% High equity: 50%

10X Retirement Calculator: probability of meeting your goal

HEADING

What maximises the probability of meeting your goal?

High equity

+

Low fees

Source: 10X Investments, Dimson, Staunton, Marsh

10X Retirement Calculator: probability of meeting your goal

HEADING

1. When is a living annuity best?

Low fees (1% pa) and

High fees (3% pa) ruins your retirement!

Summary – an optimal default

Low equity Medium equity High equity

Male

Female

HEADING

2. Things are not always what they seem

Summary – sensible projections

HEADING

2. Things are not always what they seem

Projections must account for:

Fees

Volatility

Confidence

Summary – sensible projections

HEADING

3. Are the tools available helping or hindering your members?

Summary – meaningful tools

Fees of 1% pa:

Medium equity: 60% High equity: 75%

Thank you