Retirees need a more innovative approach to investing than that offered by traditional investment portfolios in order to navigate the current low interest rate environment, a retirement income expert has said.
According to Allianz Retire+ chief executive Matt Rady, the traditional investment portfolio approach for retirees is “outdated” and based on flawed perceptions that ultimately leave retirees exposed to low interest rates and higher market volatility.
“Traditional portfolio-construction approaches for retirees are becoming increasingly less effective. What worked in the past in retirement investing isn’t cutting it today,” Rady said.
Using volatility to define risk was a key flaw in the traditional approach to retiree portfolios, he noted, as was an inadequate response to share-market volatility.
“For years, retirees have been told to hold more defensive assets (bonds, cash) and fewer growth assets (equities) as they age. But that theory is now blown out of the water because it consigns them to low returns and a higher risk of running out of money,” he pointed out.
“Retirees have to hold a lot more growth assets to generate the same return as previous years. But that exposes their portfolio to much higher return uncertainty at a time in their life when they have less capacity to recover from financial setbacks.”
He also highlighted the adverse impact of heightened sequencing risk faced by retirees during times of higher volatility.
“Those nearing or just in retirement, who held more shares for yield, watched the value of their shares tumble in March as the pandemic erupted,” he said.
“Sadly, some will never fully recover those losses because their portfolio was in the wrong place at the wrong time.”
One way financial advisers could seek to protect retiree capital was to consider protected-style equity-linked products for their clients, he added.
“As retirees hold more growth assets, protected equity strategies must be embedded within portfolios to better manage volatility and all the problems it creates,” he said.
In July, Challenger retirement income chair Jeremy Cooper said SMSF members who are also retirees were facing a new dynamic as to how they could generate retirement income due to the impact of the coronavirus pandemic on their capital invested in equities and property markets.
