This presentation covers questions such as What happens to your members when they leave? When is a living annuity better?

1. An Optimal Retirement Default
Tracy Jensen, July 2013

2. What happens to your members when they leave?
VIDEO GOES HERE

3. HEADINGIt’s all about the goal
Options?What is the goal?
Income
Term
Affordability
Inflation
Longevity
Flexibility
Estate

4. HEADINGIt’s all about the goal
Options?What is the goal?
Income
Term
Guaranteed annuity Living annuity
Inflation-linked Portfolios: Low equity
Medium equity
High equity
Fees: 1% vs. 3%

5. 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

6. HEADINGLiving annuity projection - Male
*Projection between 10th
& 90th
percentile Source: 10X Investments, Dimson, Staunton, Marsh

7. HEADINGLiving annuity projection - Male
*Projection between 10th
& 90th
percentile*Projection between 10th
& 90th
percentile Source: 10X Investments, Dimson, Staunton, Marsh

8. HEADINGLiving annuity projection - Male
*Projection between 10th
& 90th
percentile*Projection between 10th
& 90th
percentile Source: 10X Investments, Dimson, Staunton, Marsh

9. HEADINGLiving annuity projection - Male
*Projection between 10th
& 90th
percentile*Projection between 10th
& 90th
percentile Source: 10X Investments, Dimson, Staunton, Marsh

10. 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%

11. HEADINGLiving annuity projection - Female
*Projection between 10th
& 90th
percentile Source: 10X Investments, Dimson, Staunton, Marsh

12. HEADINGLiving annuity projection - Female
*Projection between 10th
& 90th
percentile Source: 10X Investments, Dimson, Staunton, Marsh

13. HEADINGLiving annuity projection - Female
*Projection between 10th
& 90th
percentile Source: 10X Investments, Dimson, Staunton, Marsh

14. HEADINGLiving annuity projection - Female
*Projection between 10th
& 90th
percentile Source: 10X Investments, Dimson, Staunton, Marsh

15. 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%

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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%

23. 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

24. 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

25. 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

26. 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

27. 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

28. HEADING
2. Things are not always what they seem
Summary – sensible projections

29. HEADING
2. Things are not always what they seem
Projections must account for:
Fees
Volatility
Confidence
Summary – sensible projections

30. HEADING
3. Are the tools available helping or hindering your members?
Summary – meaningful tools
Fees of 1% pa:
Medium equity: 60% High equity: 75%

31. Thank you