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Retirement
Solving for the retirement challenge in Asia
Philip May
Director of Retirement Income Solutions
KEY TAKEAWAYS
  • Longer life expectancies mean that many countries, especially some in Asia, face the challenge of ensuring their citizens can look forward to a financially secure retirement, which may last for decades. 
  • Among the issues is the ability to deliver outcomes that solve for the continuum of investor goals as they move from building retirement to living in retirement.
  • An adaptive approach that seeks to achieve an appropriate balance of growth, income and stability at key life stages, such as target date solutions, could help in addressing several of these challenges.

Retirement around the world is changing. In OECD (Organisation for Economic Cooperation and Development) countries, men retiring in 2018 could expect to enjoy a retirement almost two-thirds longer than their counterparts in 1970. For women, time spent in retirement is 50% longer than it was in 19701. With longer lifespans and a growing emphasis on private savings as an income source, the adequacy of current retirement investment strategies and products is being called into question.


Asia has among the highest post-retirement life expectancies in the world. In Hong Kong, Singapore, Korea and Japan, the average 65-year old male can expect to spend almost 20 years in retirement, according to OECD estimates for 2020. For women, that figure is even higher, closer to 25 years. By 2060, time spent in retirement in these places is expected to increase by five years, meaning retirees will need the wherewithal to finance their lifestyle for up to 25 to 30 years. 2


The economic and social stakes are significant


Despite the fact that state provision of retirement income in Asia has typically played only a supplementary role to family support and personal savings, retirement assets are significant. In Singapore, total assets in retirement savings plans are valued at more than 80% of total GDP3. As retirement savings grow, ensuring that these assets are managed in such a way that they can be reliably enjoyed by retirees and sustain them through their lifetime is crucial.


With the historic bias towards the accumulation phase, a continued focus on maximising private savings before retirement is expected and desirable. However, without appropriate investment solutions designed to meet changing needs both approaching and during retirement, members will be less likely to optimise their savings and achieve the growth and income necessary to see them through their retirement in comfort. This places even greater emphasis on the need for suitable and flexible solutions, particularly in the decumulation phase.


The conundrum of cash


One aspect of the retirement challenge in Asia, although not unique to the region, is the fondness to hold cash. Households in Asia, including Singapore, Japan and Korea, tend to hold a greater proportion of their financial assets in liquid assets. For example, in Singapore the average household has 35.5% of its assets in cash or deposits, which is double that of US households, which hold only 12.7% by comparison.The issue with retirement assets too heavily weighted towards cash is that, as an asset class, cash doesn’t have the potential to grow in value, keep up with inflation, or provide a significant income stream, so drawdowns can deplete capital reserves quite aggressively.


Why it matters: small increases in returns can dramatically improve outcomes

Impact of 50 bps and 100 bps increases in return in a hypothetical savings and withdrawal scenario

Past results are not a guarantee of future results.

Source: Capital Group. The demographic assumptions, returns and ending balances are hypothetical and provided for illustrative purposes only, and are not intended to provide any assurance or promise of actual returns and outcomes. Returns will be affected by the management of the investments and any adjustments to the assumed contribution rates, salary or other participant demographic information. The additional years of retirement spending are intended to represent a conservative measure. Actual results may be higher or lower than those shown. Based on an exhibit from Russell Investments.

1. Data as at 2018. Source: OECD. Stat. Expected number of years in retirement

2. Data as at 2018. Source: OECD.  Pensions at a Glance Asia/Pacific 2018

3. Data as at 2019. Source: OECD Global Pension Statistics. Pension Markets in Focus 2020

4. Data as at 2018. Global Wealth Report 2019 by Credit Suisse. ‘Liquid assets’ refers to currency and deposits; ‘Equities’ refers to all shares and other equities held directly by households; ‘Other financial assets’ can include insurance, pension reserves and other accounts receivable


 

Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
  • Depending on the strategy, risks may be associated with investing in fixed income, derivatives, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Philip May is Director of Retirement Income Solutions at Capital Group. He has 41 years of investment industry experience and has been with Capital Group for 15 years.


 

Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.