Outdated portfolio thinking has left millions of Australian retirees vulnerable to low interest rates and higher share market volatility, according to Allianz Retire Plus.
Due to lower interest rates, retirees were taking on more risk to earn enough investment income to live on which could be a blow to their wealth.
Matt Rady, Allianz Retire Plus chief executive, said the latest rate cut to 10 basis points was another blow for retirees.
“Some retirees are investing in shares to earn higher yield – and are left wide open to high market risk – another financial shock could be financially catastrophic for them,” Rady said.
Analysis from the Reserve Bank of Australia (RBA) showed the average dividend yield was about 4.5% in 2019 but was lower this year because of dividend cuts due to the COVID-19 pandemic.
Rady said there were two main issues with the current portfolio approach which were using volatility to define risk and an inadequate response to share market volatility.
“Most retirees don’t care about volatility or standard deviations. Their greatest risk is running out of money during retirement,” Rady said.
“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.”
Rady said financial advisers should look to protect retiree capital in the share market.
“As retirees hold more growth assets, protected equity strategies must be embedded within portfolios, to better manage volatility and all the problems it creates,” Rady said.
