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  1. Victor Clarke

     /  September 12, 2017

    This article, in common with most similar articles, does the analysis based on a conservative asset mix. That seems to be the default advice that financial planners give to clients.

    In my view, that advice is based on a wrong assumption. It forgets that the Aged Pension acts as a fantastic “stop loss” policy for everyone in that age range. Effectively the pension is a large “defensive” asset that allows people to take a more aggressive investment strategy. See this article from Cuffelinks that explains this very well


    A far better strategy would be to invest the majority of the money more aggressively (portfolio heavily weighted towards equites rather than fixed interest / cash).

    Under this strategy, over the long run the portfolio would be likely to generate say 10% made up of dividends 4.5%, benefit of imputation credits 2% and capital gains 3.5% (nil tax as money in pension). The couple can live on the 6.5% and bank the capital gain, or if they want also draw down some of the capital over time – resulting in far higher outcomes (with theoretically more risk).

    Four ranges of outcomes potentially arise:

    1. market goes up and down, but over time grows at an average of 3.5% (conservative compared to history). They can spend the income of 6.5% and their assets grow at 3.5% – income is much higher than relying on the pension as the main income source.
    2. market goes into a crash, and say falls 35%. In this scenario, actually their income probably only declines 10% as even in crash situations all that happens is dividend yields blow out, and most of the dividends they received previously continue. If they ride the crash out, all our history tells us that over time the asset values will recover (although it may take time). They still are much better off, and may get a little more pension than they were previously to partly cushion the decline.
    3. market crashes 35% and asset values never recover in their lifetime, and dividends also fall 35% (or even worse they sell all their equities at the bottom of the crash and it does recover. Yes in this scenario their income is less than outcomes 1 and 2, and their assets are 35% less than under your scenario. However their income is likely more than the conservative scenario, and to the extent it declines, their pension income increases to partially offset. Remember though this is a relatively unlikely outcome, providing they don’t sell the assets at the bottom of the market!
    4. Doomsday scenario. Market crashes 75% and never recovers in their lifetime. Yes total wealth is blown up, but they still have similar income to your scenario. So the kids lose out on an inheritance, but the couple are protected. A very unlikely scenario (but of course feasible).

    People really need to think about what is their goal – in my view it should be about maximising income across the remaining lifetime. A conservative asset mix is just a way of ensuring that income declines over time with inflation and protecting assets (but exposing them to inflation) for the next generation. A more aggressive asset mix will deliver far better income outcomes for the retirees, most likely deliver higher asset values, and in the event of a doomsday scenario they are unlikely to be much worse off due to the protection of the age pension.


    • Hi Victor, while I agree with your premise that retirees should look to maximise income, most financial planners find that people need the “sleep factor” more as they age and when Alan Kholer comes on the news at 7pm and says the markets have dropped, people really worry and some panic. I do believe education and transparency of portfolio is the key. You can show most retirees all the projections in the world and that will not matter a damn if they are scared. At Verante we work on a educating clients over the long term to take a Moderate or 50/50 approach to investing in retirement and ensure they have 3-5 years cash flow in defensive assets supported by a shares and managed fund and/or property portfolio. So I believe a happy point can be found somewhere between the traditional Conservative model which is very much promoted int he USA and your Aggressive Model. Thank you for contribution to the debate.



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