Future-proofing retirement portfolios

Retirement portfolios need to generate a stable income, preserve capital and still offer some level of growth to allow investors to manage inflation and longevity risks, along with a reasonable standard of lifestyle. Retirees also need to be cost conscious, understanding how fees can affect their overall returns and balance. This poses more challenges than in the accumulation phase.

The current Association of Superannuation Funds Australia (ASFA) retirement standards paint a confronting picture of this investment challenge. According to the standards, a comfortable retirement for a single person means an annual income of $43,687 per year. 

This income is generated by having savings at retirement of $545,000 and assumes that the individual will own their own home mortgage free, will drawdown their finances completely, take a partial pension and receive annual investment earnings of 6%.

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It is this last figure that poses concerns for many. 

Between globally low interest rates and a challenging market environment during the COVID-19 pandemic, financial advisers have been forced to consider alternative and more creative sources of income for their clients’ portfolios, such as managed investments like exchange traded funds (ETFs). 


Equities play a dual function in a retirement portfolio with the aim to offer both growth as well as some form of income. 

Many financial advisers are currently using equities for dividend income in their clients’ portfolios while remaining conscious of risk tolerance and retirement suitability.
There are two key approaches that may be suitable in retirement:

1. High yield paying equities

In this strategy, investors aim for high-yielding companies with solid cashflow and earnings prospects at a fair valuation. It’s not uncommon for companies paying high dividends to also be priced above their true value. Financial advisers also need to monitor activity to avoid companies where high dividends are instead a sign of company distress or are unsustainable in the long-term.

Using managed options such as smart-beta ETFs, which identify or eliminate companies for investment based on certain characteristics, may be a time-efficient and cost-effective option for financial advisers to access high yield companies. 

This approach could be used with domestic equities but financial advisers may also consider extending it to international equities for diversification. 

2. Less cyclical and more stable sectors and industries

Financial advisers looking for stable and defensive industries with consistent dividend streams might turn towards the infrastructure sector. This sector includes many essential services areas such as utilities, telecommunications, industrials and transport. These tend to be less vulnerable to market cycles and movements.

Infrastructure tends to be less volatile than other sectors, such as technology or banks, making it worth investigating for retirement portfolios. The reason for this comes down to the nature of infrastructure assets.

Infrastructure industries typically have high capital costs, low elasticity of demand, long business timelines and often exist as regulated oligopolies or monopolies. 

Their capital-intensive nature means that they are very difficult and, in some cases, like energy distribution networks, nigh impossible to disrupt. 

Many Australian investors will have some infrastructure as part of their portfolios, with a greater leaning towards real estate, but may be missing diversification to international assets offering wider scale of operations.

Investors looking for broad and liquid exposure could consider infrastructure focused ETFs. 

Equities may not be suitable for all clients, which is where advisers may consider other asset classes.


Financial advisers may be wary of alternatives in a retirement portfolio, assuming these will be higher risk and higher cost. Though investments like hedge funds may tend to fall into this category, commodities like gold can offer diversification and stability.

Gold is often treated as a safe haven asset and holds both defensive and growth characteristics. Its position as desirable from both a consumption and investment perspective has allowed it to perform in a range of markets. 

For example, Table 1 shows its performance compared to equities during a range of market events.

It also has a low (and at times, negative) correlation to other asset classes making it an appropriate diversification tool for retired investors.

Investors can access gold in a range of ways but using a gold-backed ETF is an effective option as it is liquid, easy to use and lower cost compared to the costs of purchasing and storing physical gold bullion.

While gold tends to be more popular, other precious metals can be appealing for investors too. 

Silver historically performs in a similar way to gold. Where it differs from gold is that its price is driven by industrial demand as well as investment demand. It has wide applications for industry and technology manufacturing, and 52% of global use of silver is for this purpose. 

While considering defensive properties from commodities like gold and silver, a balanced retirement portfolio should still maintain exposure to fixed income and cash.


Even in the current low interest rate environment, exposure to fixed income and cash remain important components of a diversified retirement portfolio. Fixed income continues to offer predictability and stability of income and assists in offering a buffer against volatility in equity markets.

Just as with equities though, many Australian investors may be too concentrated towards Australian fixed income and currency. Diversifying globally can help buffer against changes in any country where an investor is likely to have exposures. 

Investors can also generate income through cash investments internationally – and where international currencies appreciate or depreciate against the Australian dollar, there may be the opportunity to realise capital growth depending on the type of investment used.

One example is using the US dollar, the most heavily-used currency in the world based on foreign trade and reserve bank holdings.


Retirement portfolios need to be cost-conscious and ETFs may be a suitable option for financial advisers to consider. There are a wide range available on the Australian stock exchange, covering a range of assets, sectors and styles.

ETFs typically have lower management costs compared to actively managed options, with purchases involving a brokerage fee, much like shares. 

They also offer more cost effective diversification and access – owning individual shares covering the entire S&P/ASX 200 or the S&P 500 may be out of reach for most investors, but using an ETF which invests in all of these companies may be within the cost budgets. 

There’s also the matter of administration. ETFs are easy to use and generally liquid investments which can be traded on the stock exchange, compared to filling out documentation for managed funds or physical assets.

They are also less time consuming than individual share and asset ownership, allowing financial advisers to focus their time on client relationships and overall strategy.


While the current environment may have posed challenges for investing a retirement portfolio, it has highlighted the importance of a diversified approach to assist with growth and income. 

More than other investors, retired investors also have constraints around risk and costs to consider and this is where ETFs can be an effective solution for portfolio construction. 

Financial advisers have been forced to adapt not only to changes in the working and regulatory environment but to a new world for retirement investing. It is likely that the lessons of today will hold to the future. 

Diversifying yield across more investments than just cash and fixed income has become the standard for risk management and to help with achieving income goals.

Kanish Chugh is head of distribution at ETF Securities.

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