Superannuation are savings for retirement, not the accumulation of a pot of money, according to Nobel laureate Robert Merton.
Merton, one of the fathers of modern day option theory and winner of the Nobel prize for economics in 1997, has some good advice for Australia’s savers and retirement industry. He said that Australians’ focus on their super balance drove overly risky behaviour.
“We are teaching people to look at the wrong number,” he told Fairfax.
In what would be a radical shift for Australians focused on cash, and with an opportunity to double dip into a pension if necessary, Merton said:
What is a good retirement is measured by the standard of living you want in retirement, and standard of living is not defined by a pot of money but a stream of income. A good amount for retirement would be to sustain the standard of living you have become used to enjoying in the later part of your working life. That is an income goal; it’s not a wealth goal.
Super funds shouldn’t be focusing you on how many dollars you have in your account but how many income units you have. They don’t do this now, but this is going to change.
The problem with that is most people think a “certain dollar” value of their super represents this retirement standard of living.
Merton seems to be cheerleading for those who believe that stocks should be held longer into retirement and not converted to fixed income.
Every system says the closer you get to retirement, the more conservative you should become, but the irony is what they call safe is fixed income.
In many systems, and I wouldn’t be surprised if this was the case in Australia, you will be invested in a one-, two-year or five-year bond. But from an income point of view, that is one of the riskiest assets you could hold.
It might seem nuanced and financially wonky for Merton to say that fixed income is risky. But he is simply highlighting what all Australian know – we are going to live longer, retire longer and our super needs to last longer.
So how we manage our pot of money, both in the accumulation phase of our working lives and then in retirement, needs rethinking.
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