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Rethinking ‘safe’ investments for retirees

Reece Birtles, Portfolio Manager and Will Baylis, Portfolio Manager, Martin Curries Australia
February 2016

Back in 2010, Martin Currie started to look at how the ageing population was changing the retirement environment in Australia, and how people moving into retirement were actually going to fund their retirement.

We have been looking at how people moving into retirement were actually going to fund their retirement since 2010 when we launched our successful Equity Income strategy, built specifically with retirees’ income needs in mind. For the previous 20 years, the industry had focused on building products for accumulation strategies, where the goal was to maximise the total dollar balance before reaching 65 years of age, then annuitize. There had been less focus on building solutions specifically for retirement income as the historically high term deposit rate had been an easy destination for funds. Our analysis found that if investment products are designed with the objective to ‘maximise the probability of a stable and sufficient income for life’, then income stability becomes more important than capital stability.

Key findings

  • The recent Financial Systems Inquiry recommended a comprehensive income solution for superannuation funds, highlighting the current range of options is too narrow
  • Scaremongering on what retirement balance is needed does not deal with how money could and should be invested for a comfortable retirement
  • The Age Pension is not a safety net for a comfortable retirement, and unless balances are very large, term deposits no longer provide the required income yield to meet the short fall
  • Retirees should focus their asset-mix on sustainable and regular income that grows with inflation to meet their lifestyle needs, but most balanced funds focus on total returns only
  • For retirees, income stability should be more important than capital stability or total returns
  • Term deposits are not risk free: they have over twice the income volatility of an investment in equities, and capital often has to be eroded to meet income goals
  • Sticking to a single asset class (such as term deposits) or investing in the wrong combination of asset classes could leave retirees with the burden of running out of money
  • Australian retirees should seek to match their A$ cost of living/inflation liabilities with A$ assets – rather than diversifying, global assets may introduce additional unintended risks
  • A multi-asset solution, focussing on A$ bonds, Australian shares with solid franked dividends, Australian real assets such A-REITs, utilities and infrastructure – can be constructed to meet retiree income needs
  • Legg Mason and Martin Currie Australia offer a unique Multi Asset Retirement Income solution that is managed specifically from a retiree perspective.
  • This new approach provides retirees with the expected benefits of low volatility (fixed income), inflation protection (real assets) and long-term income growth (equity income), which combined minimises the need to draw down on capital and provides higher yields.

Downolad the white paper (PDF).