To coin a football analogy, ‘parking the bus’ means taking a defensive stance to protect a position. The downside of this strategy is that while bunkered down you may still concede ground or are less able to take advantage of potential opportunities. For many retirees, ‘parking the bus ‘ may not be the best approach when it comes to their hard earned savings.

Financial advisers are on the economic front line of this crisis, experiencing on a daily basis their clients’ pain, heartache and fear as decades of growth and post-GFC gains evaporate. The depth of losses are hard to predict but it’s entirely possible that markets will continue the downward trend and volatility will be protracted.

Many older Australians are nervous and it’s not an easy proposition keeping clients focussed on their strategy. Retirees are demanding protection from further losses while maintaining their income. What’s the solution?

Hard lessons from the GFC

For investors, there are few places to hide when a tumultuous event like COVID-19 strikes. For those in transition or already in retirement, concerns like sequencing risk mean they need to be extra cautious.

Hard lessons learnt during the Global Financial Crisis (GFC) suggest some strategies were more effective than others but the overarching learning looms large – avoid rash, short term decisions that may result in a long-term shortfall in retirement income.

Some of the traditional responses to market shocks include:

 

  • Cash – Portfolios heavily weighted to cash might be considered safe from a volatility perspective, but are likely to deliver very low yields well into the future. Cash is not king.A high allocation to cash can have huge implications for retirement income and the duration of a portfolio. The real cost to retirees is not just inflation, but the opportunity cost of not being exposed to growth assets.  Clients need to understand the true cost of cash.
  • Fixed Interest – Bonds and other fixed interest investments aren’t providing the income they once did due to volatile yields and spreads. While they can play an important role in a diversified retirement portfolio, in the current environment they alone may not provide sufficient income and are likely to yield returns more akin to cash.
  • Hybrids – While hybrids may provide higher yields and the possibility of capital appreciation, they are more exposed to market volatility and equity risks. Hybrids that are converted into equity can significantly increase the risk profile of a portfolio, potentially beyond the limits the client is comfortable with. Distributions may also be negatively impacted after conversion. Add to this the challenges around spreads and yields for the debt component of the security, a transition to hybrids should be considered carefully.
  • Equities – Equities, while at the mercy of market volatility, are regarded as a good long-term investment that can provide a combination of attractive yields and/or capital appreciation.However, many retirees might not have the stomach for a stock market ride that delivers a 20% loss nor do they have the time to recoup potential losses, particularly in decumulation phase. 12 years on from the GFC and retirees are still at the mercy of these black swan events.

Regardless of the investment stance, each of these choices may not deliver the results they once did. Markets have shifted, yields are at historic lows and traditional strategies may no longer be relevant. In the current environment, the status quo needs to be challenged to ensure better outcomes for clients.

Innovation delivers much needed certainty

In times of stress, clients crave confidence, control and certainty. They want to limit volatility and losses, but also want to ensure their portfolio will continue to support them well into the future. It’s a conundrum that until recently has been difficult to solve for.

Caitriona Wortley, Head of Distribution at Allianz Retire+, thinks financial advisers should rethink their approach to managing retirement savings and consider Future Safe as an essential inclusion to their retirement kitbag.

“For clients who insist on an extreme risk-off response to steep market declines or want to negate further market volatility, Future Safe is truly an all seasons solution.”

Future Safe provides the option of limiting losses to 0% while providing a capped exposure to market-linked returns. Under current market conditions, Future Safe provides clients with a defensive footing and the potential for a more attractive return profile than cash or term deposits.

Crucially, Future Safe investors can change their level of exposure to risk and returns on each anniversary of their seven-year policy. If an investor has a more positive outlook for the next 12 months and is willing to take on more risk, they can choose to limit losses to five or 10%. The higher the risk they are willing to take on, the higher the cap is on their potential returns.

“Future Safe is unique in that it has the potential to generate income and growth while offering protection from market downturns. It’s been purpose built for those in or approaching retirement. Recent events have shown a product like this has never been more relevant”.

If you have clients who are in or approaching retirement, it’s time to assess whether their portfolio has the right mix of protection and growth. Protection against sequencing risk and irreversible losses, and exposure to the growth assets required to sustain a portfolio well into retirement.

Consider how a dedicated retirement solution, like Future Safe, can help you provide your clients with confidence and certainty to calmly navigate their hard-earned retirement.

This material is issued by Allianz Australia Life Insurance Limited, ABN 27 076 033 782, AFSL 296559 (Allianz Retire+). Allianz Retire+ is a registered business name of Allianz Australia Life Insurance Limited. This information is current as at April 2020 unless otherwise specified. This information has been prepared specifically for authorised financial advisers in Australia, and is not intended for retail investors. It does not take account of any person’s objectives, financial situation or needs. Before acting on anything contained in this material, you should consider the appropriateness of the information received, having regard to your objectives, financial situation and needs. The returns on the Future Safe product are subject to a number of variables including investor elections, market performance and other external factors, and may differ from the information contained herein. Past performance is not a reliable indicator of future performance. No person should rely on the content of this material or act on the basis of anything stated in this material. Allianz Retire+ and its related entities, agents or employees do not accept any liability for any loss arising whether directly or indirectly from any use of this material. Allianz Australia Life Insurance Limited is the issuer of Future Safe. Prior to making an investment decision, investors should consider the relevant Product Disclosure Statement (PDS) which is available on our website (www.allianzretireplus.com.au). PIMCO provides investment management and other support services to Allianz Australia Life Insurance Limited but is not responsible for the performance of any Allianz Retire+ product, or any other product or service promoted or supplied by Allianz. Use of the POWERED BY PIMCO trade mark, or any other use of the PIMCO name, is not a recommendation of any particular security, strategy or investment product. The products referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such products or any index on which such products are based. The PDS contains a more detailed description of the limited relationship MSCI has with Allianz Retire+ and any related products.