The Financial System Inquiry Final Report was released in 2014 and raised the notion of a Comprehensive Income Product for Retirement (“CIPR”) to be pre-selected by super fund trustees, but only started after the member has chosen to go ahead with this option. It describes CIPR as having the following features:

  • a regular and stable income stream
  • longevity risk management and
  • flexibility

The report also makes the observation that a “combination of underlying products would likely be required to provide these features; for example, an account-based pension paired with a pooled product that provides longevity risk protection. “ Presumably, the longevity risk protection would be provided by a standard life annuity, perhaps with some modification such as a residual payout on death before a certain age.

This makes some sense, but how does an individual determine how much to invest in an annuity and how much to put into an account-based pension (allocated pension)? Well, to answer that question requires some complex modelling of:

  • longevity
  • future investment returns (which will affect the value of the account-based pension)
  • annuity prices
  • the age pension
  • non-super investments
  • tax (where relevant) and
  • the individual’s own home (if they plan to rely on that, in part, to fund some of their retirement).

In addition, both partners in a couple need to be modelled simultaneously so that the combined outcomes are appropriate to the couple.

The team at Investfit has already built the model to do all of the above except for longevity and annuity prices. These will be incorporated in the next version, to be released in early 2017 and will enable Investfit users to answer the question – how much to invest in an annuity and how much to leave in an account-based pension so that I have a comfortable retirement and at the same time will not run short of funds if I live longer than expected?