Strategies for lifecycle investment need to evolve beyond a stocks and bonds debate if investors are going to prepare properly for retirement, according to Milliman.
The actuarial and consulting firm has said that lifecycle investment discussions in Australia are “stuck in the past” and assume that mitigating investment risk in retirement needs an over-allocation to fixed income.
“I’d characterise the discussion here [around lifecycle investing] as kind of stuck in the past,” Milliman practice leader Wade Matterson told InvestorDaily.
“Really, the issue is how do you manage risk better, and I think people mistakenly equate managing risk by not having equity exposure [with] putting more money into the bonds market.”
Mr Matterson said that looking at the result of target dates funds in the United States shows the flaws in the typical approach to lifecycle investing.
Investors who prepare for retirement by increasing their allocation to fixed income are at risk of outliving their retirement funds, he explained.
“Australia has this huge cohort of people who are going to be retiring over the next 10 to 15 years and the basic reality is if they move all their assets into low returning asset classes they’re guaranteed to run out of money,” Mr Matterson said.
“So what we’ve got to try and find is some way to preserve their ability to get access to growth but do it in such a way that the risk that comes along with that is managed.”
Mr Matterson said the advent of tailored offerings for investors approaching retirement age is a better solution for ensuring adequate funds for retirement.
“You can’t design solutions that assume everybody has the same designed outcome or even the same resources available to them,” he said.
“The way that they should invest different types of products should take that into account and be tailored to understand those dynamics.”
