If your clients have been consuming the news lately, they wouldn’t be blamed for feeling anxious. Both here and overseas, there are concerns about escalating trade wars and the impact of a slowdown in US and China’s economic growth, let alone a potential geopolitical shock. In Australia, our economy has been struggling despite record low interest rates. Our GDP growth is sitting at the lowest level since 2009; inflation remains below the RBA’s 2-3 per cent target; wage growth remains sluggish; and spare capacity persists in the labour market. Australian interest rates appear to be on a downward trajectory from already record lows, and the housing market is correcting the imbalances created in the aftermath of the GFC.

Are we at the latter end of the late part of the business cycle and, if so, what does that mean for your clients entering the retirement risk zone during the seven years before and after retirement?

The risks are getting bigger

Characteristically, the late part of the business cycle is when imbalances generally appear. Risk appetite becomes high as investors are confident enough to reach for higher and higher returns. The labour market tightens as more and more people can find jobs and employers generally have to pay up for suitable workers. Inflation then usually rises, and monetary policy tightens. The yield curve flattens and may invert, and equity performance slows. Not all of these factors are apparent, but in Australia, our economy has been struggling recently despite interest rates at record lows with the outlook of going lower. The major reason is that the housing market is correcting the imbalances created in the aftermath of the GFC.

While it can be challenging to predict the end of the cycle, there is no denying serious risks appear to be creeping in. PIMCO Secular Outlook 20191 cites the outlook as “lackluster global growth, low inflation, and New Neutral interest rates” – a concept defining interest rates as remaining low over the medium term. The overall outlook predicts a shallow recession with a protracted recovery.

Looking to the recent housing downturn as a significant imbalance being unwound by credit tightening, Australia is in the late stage of the late business cycle and potentially ending a long, record, streak of economic growth that started way back in 1991. This should mean equity markets with their stretched valuations become weaker, and interest rates move lower still.

Elderly couple sitting on log in the rain and the man is covering the lady with an umbrella

Safeguard assets in the retirement risk zone

On a technical basis of two consecutive quarters of negative GDP growth, Australia didn’t have a recession following the GFC. In fact, we haven’t seen a recession for 28 years. But there was no doubt that for much of the population, the economic conditions during the GFC felt like one. None more so than those that didn’t have the option of staying fully invested to ride out the storm. 

Between November 2007 and March 2009, the stock market fell 54% from peak-to-trough, shrinking the savings of millions of Australians.  Markets rebounded in time but the effect for a retiree commencing drawdown in their supposed golden years had the potential to be financially crippling.

If an adverse market event (such as the GFC) occurs at a time when a client is about to retire and  when the dollar value of a client’s portfolio is at its largest, being hit with the worst returns in the wrong sequence could have a significant impact on whether they thrive or merely survive their retirement. With less time to recover, the combination of falling asset prices and drawdowns for income can impact the ability to fund retirement income.

With loss aversion intensifying with transition to retirement, conversations with clients will naturally turn to the safeguarding of some assets before entering the retirement risk zone. The challenge then becomes mitigating the complex financial risks inherent to retirees who are rightfully craving comfort. The implications of sequencing risk pose both financial and emotional risks. This means the need for protection, with participation in exposure to growth, income, and flexibility, has never been greater. If we are late in the cycle and still feeling the effects from the last major market downturn a decade on, now is the time for conversations around protection with participation. Allianz Retire+ Future Safe can help retirees with its range of protection options that can limit or eliminate the impact of a market downturn on their investment.

To learn more about how to protect your clients in the retirement risk zone, contact your local business development manager.

1 https://www.pimco.com.au/en-au/insights/economic-and-market-commentary/secular-outlook/2019/economic-outlook-2019/