With much to lose and little time to recover, retirees and those approaching retirement face a bigger risk than most given the current economic headwinds. Inflation and volatility are the key risks for clients either entering retirement or during retirement.
A consistently rising interest rate environment is contributing to the unwinding of a large portion of recent gains from the outperforming bull market of past.
“Record low interest rates forced investors to search for yields in riskier asset classes, which paid off as falling rates ballooned asset prices across the board, from houses, to tech companies to crypto assets,” says Allianz Retire+ Chief Product & Marketing Officer, Simon Aboud.
However, the cycle is correcting forcing advisers to rebalance and adapt to changing market conditions. “We saw equity markets sell off significantly, bond indices with negative annual returns and we are now starting to see weakness coming to the housing market. Higher interest rates aren’t much use if you erode your retirement capital as they arrive,” Aboud says.
It’s a difficult time for advisers traversing the challenging economic conditions. Re-positioning portfolios more defensively to preserve capital without losing potential growth opportunities for when the market starts to recover is a critical dilemma.
Which is why dedicated retirement products like Allianz Retire+’s Future Safe, combined with advanced modelling techniques like stochastic modelling, can help advisers to build stronger and more confident portfolios that ultimately improve income certainty in retirement.
Risk management, the key to building sustainable retirement portfolios
Building retirement portfolios that offer a higher likelihood of achieving income objectives can be difficult. Growing life expectancies, combined with increasing volatility and riskier asset allocations, are increasing sequencing (and longevity) risk.
Decumulation is a different skill set to the accumulation phase of clients. Allianz Retire+ understands that performance and growth are the drivers of a successful accumulation strategy, but this is not the case for decumulation. Risk management sits at the heart of any decumulation strategy.
Aboud says, “The current inflation spike has added a new sense of urgency to the search for risk mitigation solutions that keep retirement portfolios safeguarded through rough conditions.”
Future Safe addresses the risk and uncertainty inherent in retirement portfolios by harnessing results and limiting losses. The flagship product addresses the need for growth through its exposure to share market-linked returns up to a selected cap, while offering protection options that limit losses. It has the potential to generate income and growth while offering protection from market downturns.
Creating certainty when everything feels unsteady
Longevity risk; the most-feared threat of running out of money before life is a critical issue for clients. So how can advisers guarantee certainty for retirees?
By partnering with retirement specialists that are offering innovative retirement solutions. Reliable partners can enhance strategies with protection to help combat low yielding traditional defensive assets, like cash and term deposits or riskier growth assets.
Future Safe provides protection from market downturns while continuing to offer the potential for much needed growth, regular income payments and flexible withdrawal options.
“Rising inflation is a primary catalyst for lifestyle risk in retirement. It has been historically low over the last 10 years, but a return to its long-term average that alone would wipe 10 years of income from a retiree’s portfolio,” says Aboud.
“Loading up on equities, can weigh heavily on retirees and their advisers: retired investors clearly need exposure to the upside potential of growth assets to help counter inflation risk but as a group they remain the least tolerant, both financially and behaviourally.”
Income for life
Retirement requires income for life, which is why the life insurance sector has a significant role to play in providing guaranteed income certainty. With a strong balance sheet and appropriate scale, life companies are poised to endure market downturns and give confidence to retirees.
As part of one of the world’s largest insurance companies, Allianz Retire+ has tapped into a deep reservoir of local specialists and its market-leading retirement capability globally.
“We believe it’s an opportune time to consider the role that protection can play in a retirement portfolio,” Aboud says.
Volatility has a high price for retirees. We look at how increasing volatility, rates and inflation impact portfolios. Request the full report today.
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