23 February 2015

Helping your clients boost income and preserve capital in retirement

Superannuation has been one of the great Australian success stories lately, with assets climbing to over 100% of GDP in two decades. But as we shift to drawdown phase, carefully protecting the assets that clients have saved over a lifetime can be just as important as creating returns in the first place.

As people live longer, face more complex needs in different phases of retirement, and need more income, our industry will also need to continue to develop innovative new products that meet those challenges.

Zurich Investments takes a look at some innovative solutions available to help retiring clients draw high levels of income, and maintain exposure to some equity market growth – with lower volatility – all at the same time.

Boosting the total income of a portfolio

Whilst equities can provide income and more long term growth to compensate for their higher levels of volatility, there is one special weakness with equities that reduces the willingness of retirees to allocate more – so called “sequencing risk”. Even though equities provide superior returns in the long run there is the risk that significant negative returns, particularly in the early years of retirement, can impair the limited capital retirees have available to them in the first few years of retirement.

But, there are ways of boosting the total income of a client’s portfolio without radically altering their fixed income component. By altering the return profile of the equity portion of a client’s portfolio, not the fixed income portion, you can achieve a virtuous circle of results.

  1. Raising the total level of distributable income for clients to fund their retirement lifestyles
  2. Dampening portfolio volatility to give clients the equity exposure they need without the same level of risk as a normal equity fund.

Not only does this help resolve much of the income challenge but it gives clients a better chance of preserving their capital for longer – dealing with the rising importance of longevity risk.

Two asset classes are critical in achieving these goals – Equity income and A-REITs

Retirees will firstly need to look at equity income a little more. These products use options markets to convert some future capital gains into upfront income, or option premium. Some of this can be distributed to clients and some can be used to control risk, allowing better management of up and down markets. Properly managed equity income funds have become an excellent way for retirees to generate income and at the same time capture the benefits of equity market exposure to lengthen the life of their portfolios in retirement without enduring the full force of the “sequencing risk” that equities carry.

Australian Property Trusts, or A-REITs as they are popularly known, is another asset class that may suit retirees. In some respects they have become the “forgotten asset class” as many investors have come to treat all Australian equities as one investment sector. But A-REITs have always occupied a unique space in between equities and bonds, sharing some characteristics of each – better yields than bonds, but less risk than equities and with some conservative growth of 3-4% p.a. as well.

Studies in the US in recent times have indicated that REITs offer better inflation protection than most assets classes, whilst still providing high levels of distributions – which is yet another potential future risk that property trusts may help manage.[1]

As the cost of living continues to rise, find out how you can help your retiree clients protect their savings and also generate returns to ensure they have enough in this Zurich Investments practical case study.

[1] Inflation and Real Estate Investments, Brad Case and Susan Wachter

Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated February 2015, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich. CLYH-009760-2015
Past performance is not reliable indicator of future performance.

Leave a Reply

Your email address will not be published. Required fields are marked *