Inflation is the "number one enemy" for retirees, according to Professional Wealth managing director Doug Turek – but it can be effectively countered with inflation-linked bonds.
In addition to the fact that retirees currently have large exposures to cash and term deposits, Turek pointed to recent FinaMetrica research that found about one-third of Australians are "emotionally intolerant" of equities.
But investors who turn their focus away from equities and towards bonds are at risk of simply swapping equity risk for interest rate risk, Turek said.
"You may no longer be frightened by equities, but you can have your financial retirement driven by [central bankers] telling you 'this is how much you can live off this month'," he said.
According to Turek, the defensive part of a retiree's portfolio should be made up of a 'floating rate' component, a 'fixed rate' component and an 'inflation-linked' component.
The floating rate portion is made up of instruments that earn more money if interest rates rise; the fixed interest component is made up of investments that help investors profit if rates fall; and the inflation-linked part of the portfolio should consist of instruments that are tied to the consumer price index (CPI) rather than interest rates, Turek said.
The income from inflation-linked bonds is also based on a fixed percentage of the bonds' capital value, "so if the CPI rises, so will income", Turek said.
One problem for retail investors is that inflation-linked bonds can display a lot of "noise" in the short term, since they are exposed to a lot of "trading issues", he added.
"You get more noise in an inflation-linked bond than you'd get in a nominal bond. But in the long term the inflation-linked bond is still going to end up with a CPI-adjusted maturity value," Turek said.
