Retirees need to think about different kinds of income in retirement, and also have different options available to them to be able to do that, according to Challenger head of retirement income research, Aaron Minney.
"A lot of people they just assume that they will be living off the accounting income, and that's all the income that matters and that's fine. The reality is, if you do that, then you're leaving all your capital at the end. Now, the [Retirement] Covenant is very explicitly trying to steer people away from that by saying consume your capital, but people don't really know how to do that," he says.
"If you think about the lifestyle you can afford, well if you try and afford the lifestyle and preserve your capital, a bit like trying to have your cake and eat it, you can't have that much. Whereas if you're actually consuming the capital, your lifestyle is a lot better. So, it's all about maximizing, in a sense, what you're getting out of life or what you're able to enjoy for a lower cost."
Acknowledging the commercial aspect for Challenger, as it offers lifetime annuities which can be an efficient tool for transforming capital to income, Minney says he thinks the industry servicing retirees needs to consider a range of possible retirement solutions that look at a combination of different drawdown strategies, asset classes and investment types to help retirees maximise their lifestyle in retirement.
"Infrastructure and property work quite well. Equity income strategies is a category there where it's actually quite beneficial where you've got a fund manager who targets companies that are producing income, and then manages risks around that. Slightly different to standard market exposure, but you can be generating income, and at least for most people under current conditions, that doesn't create a tax problem in retirement," he says.
Minney points out that when you've got a 0 per cent tax rate, it's actually better to maximize the amount you get taxed, because that amount multiplied by zero is still zero.
Essentially, what would be most helpful to retirees is to have advice or guidance that shows them the range of options available to them in retirement that helps them avoid the anxiety they have around running out of money and often results in a frugal strategy whereby they end up only withdrawing the minimum pension amount.