Financial advisers should consider alternative defensive strategies that can boost returns and minimise risk in retirement portfolios, according to Allianz Retire Plus.
The research found retirement strategies that offered downside protection and were traditionally used in the equity component of portfolios to safeguard against sharemarket volatility were not thought of as an approach that can potentially deliver higher returns than traditional defensive assets.
“With the cash rate near zero, retirees who have a lot of savings in cash risk going backwards financially in real terms and having a significantly lower standard of living this decade, compared to a pre-GFC environment,” Allianz Retire Plus chief executive, Matthew Rady said.
However, many retirees favoured cash because they wanted the peace-of-mind that protection and return certainty offered but the downside in the current environment was minuscule returns.
“With interest rates at unprecedented lows, and unlikely to head substantially higher anytime soon, retirees need the defensive component of their portfolio to work harder for them,” Rady said.
“They need to ask: how can I get a better return than I’m currently getting from my term deposits or cash, while ensuring there is still sufficient downside protection for my retirement savings? We believe protected retirement strategies that are backed by a life company are part of the answer.”
Rady also cautioned that there was a potential limited downside risk involved as returns were generated from having linked exposure to local and international shares.
“A protected retirement strategy is not risk-free, nor is it a cash or term deposit. It’s a completely different longer-term product, with sharemarket linked returns. We don’t see this as a complete portfolio solution, nor is it a replacement for fixed income in a defensive portfolio. It’s rather one component of a good overall retirement strategy,” he said.
Rady warned that definitely worth advisers should assess the cash component of their defensive portfolios and assessing a retiree's risk appetite to alternatives in this environment “if a retiree is prepared to weather a potential downside loss of 0.8% per annum, the flip side potential could be up to seven times the current term deposit rate.
“That could make a huge difference to returns on part of their defensive allocation over time – and to their standard of living.
“People in retirement get peace of mind from having downside protection, which is the sense of safety they feel in cash, but potentially a higher return than cash, generated from having exposure to local and international shares. In this market, every extra point of return counts.”