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Is risk the new normal in retirement?

Reserve Bank of Australia governor Glenn Stevens recently remarked that those about to retire are in a much worse position than those retiring 10 years ago. Such comments suggest the conventional theorem of putting your retirement savings to work in low-risk investments as soon as you finish your working career won’t generate enough income for the retirement phase.

Following on from Stevens’ comments and in today’s record low interest rate environment, where nominal returns on low-risk assets are low, any investor nearing retirement needs to evaluate how hard their savings are working for their future. On top of this, we’re also living longer than ever before and therefore have a much longer retirement period to fund.

It is becoming more apparent that in order to avoid a drop in living standards when Australians leave the workforce, they need invest in a higher-risk portfolio with greater exposure to asset classes such as equities. However, there are tools available that can mitigate unnecessary risk and protect them from the inherent equity risk, while also maximising the value of their lump sum.

Up until recently, the search for income within Australia has been a prosperous one. But as assets in SMSFs continue to climb, investors are starting to look beyond Australia’s borders to tap into larger and more varied opportunities found overseas. International markets offer opportunities for growth and income from industries that are simply unavailable in Australia.

Yield opportunities remain highly concentrated in a small number of sectors dominated by a few large companies, which has made it difficult for Australian investors to create a truly diversified, yield-oriented equity portfolio within the confines of our local market.

In the past, investors would decrease their exposure to equities as they got closer to retirement, but there is a mounting case for increasing the asset allocation to equity investments in retirement.

While Australian shares have traditionally offered higher yields than overseas equities, it is possible for investors at all stages of retirement to access significant income opportunities in markets across the globe.

The answer, or at least part of the answer, is diversifying offshore with Australian Securities Exchange-listed exchange-traded funds (ETF). Locally listed ETFs can provide Australian investors with access to hundreds of overseas companies with a single trade.

ETFs are an easy story to tell – particularly among more conservative SMSF investors or those with limited investment knowledge. One of the biggest challenges to building international exposure is complexity. ETFs address this as they are simple to use, yet can provide effective diversification by widening the economic exposures in a portfolio.

Global income ETFs, such as the SPDR S&P Global Dividend ETF, are one of the vehicles investors are using to gain this exposure and tap into the income-generating potential of some of the world’s most sought-after companies, including Coca-Cola Amatil, China Mobile and Canon.

One feature that appeals to investors of all experience levels is their transparency. At any point in time an investor can see which shares they have invested in, in real time, which provides peace of mind, particularly in today’s climate.

State Street Global Advisors’ (SSGA) Retirement Lifestyle Builder Fund follows the same methodology and accepts the best way to maximise the amount of invested money is to invest in a more risky portfolio using a mix of ETFs and unlisted trusts. The Retirement Lifestyle Solutions are not hedge funds, rather assets are carefully selected to meet the investment objectives or excluded in times where they appear overpriced, or when SSGA can identify there is more risk than they are comfortable with.

As we look forward, there are a number of concerns facing retirees in the Australian economy: the slowing of demand for resources, record low interest rates and inflated house prices, among others. But considerations like these suggest accessing new income opportunities by diversifying through ETFs is within reach of our growing self-managed retiree sector.

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