Following the release of it Strategies for Managing Investment Risk in Retirement white paper, BetaShares said the “greatest challenge” for retirees focused on retirement financial assets like bonds is that returns have “declined significantly”.
“The real (after-inflation) yield on 10-year government bonds has declined from an average of five per cent per annum in the 1990s, to only two per cent per annum so far this decade,” BetaShares chief economist David Bassanese said in a statement.
“The real cash rate has declined from an average of around 3.5 per cent per annum back then to be effectively zero today, increasing the probability of investors running out of money during retirement,” Mr Bassanese said.
In order to address these challenges, Mr Bassanese pointed out an alternative investment strategy for retirees is to “harvest a strong dividend income stream from the equity market” while adding a “risk management strategy to defend the portfolio against downside risk”.
However, Mr Bassanese highlighted that equity markets “remain as volatile as ever”.
“History suggests new retirees will face at least one gut-wrenching 30 to 50 per cent equity market decline in their remaining lifetime,” Mr Bassanese said.
Mr Bassanese also said diversifying into international equities is expected to be of “limited benefit due to high correlations between Australian and international equity markets, especially during 'market declines'”.
