The wrong question about retirement | Insight Investment

Rethinking DC: what retirees need and how to deliver it

"The industry challenge is to turn institutional pension techniques into a simple, salary-like income experience that allows members to spend with confidence, for life."

• Retirement planning asks the wrong question, in our view – instead of focusing on the size of a retiree’s retirement pot, we should look at what level of sustainable income a retiree’s pot can deliver. This will help us understand the true risks that shape retirement outcomes.
• Retirees tend to face three core regrets: running out of money, dying with too much unspent wealth, and being forced into painful income cuts. Most current approaches to retirement planning avoid one regret only by making the others more likely.
• A good retirement income solution should deliver three things: income that is lifetime, flexible, and stable. Achieving these goals requires managing interest rate, growth, and sequencing risks.
• Individuals cannot solve these problems on their own. Defined benefit pension schemes have the right tools, but they rely on scale, pooling and institutional expertise that retail retirees typically do not have.
• Applying proven techniques, in the right product design, can help retirees achieve their goals. Such an approach could combine a managed account in early retirement with annuitisation later in life, to preserve flexibility while securing guaranteed income later.
• The next step is product development. The institutional toolkit already exists, but regulation, distribution economics and investor behaviour have slowed its translation into retail solutions.