Defensive SMSF portfolios lack sustainability, report says

A recent report has found that despite the tendencies of retirees to invest conservatively, a defensive portfolio could shorten the period over which retirement income can be paid.

The Future of Retirement Income Report released by ASFA and State Street Advisers last week claimed a diversified portfolio based on data from between the years 1990 and 2012 performed “significantly better than the defensive”.

“Average results increased the length of period of drawdowns from the lump sum by around eight years,” said the report.

The portfolio asset allocation of the diversified portfolio included 26 per cent Australian equities, 17 per cent international equities, five per cent property, 10 per cent alternatives and 43 per cent cash/fixed income.

The defensive portfolio on the other hand consisted of 25 per cent Australian equities, and 75 per cent fixed income and cash.

The results were based on a couple with $510,000 as a lump sum on retirement.

According to the report, the analysis shows that “increasing the growth assets and the diversification in the portfolio has positive benefits in terms of the period over which retirement income can be maintained”.

“Many retirees look to reduce the volatility of their portfolio balance and increase the steadiness of income received by increasing the amount of cash and fixed income in their portfolio; however, this will usually shorten the period over which income is paid,” said the report.

Retirees, it said, are often uncomfortable with the idea of holding larger proportions of growth assets in retirement, preferring to spend the income which is generated by dividends from equity or interest payments for cash deposits.

“However, this analysis shows that a disciplined approach to withdrawing cash from your account, including selling assets as required to meet income requirements, will achieve a better end result.”

ASFA said the findings of this report and other policy research ASFA has conducted show the need for additional products providing more flexibility and that meet the need to protect against the risks of longevity.

“While this paper deals with the income which can be generated from portfolios with different mixes of assets, it links closely with the need to help individuals to plan their retirement spending,” said ASFA.

“In the current system, there is no standardised guidance as to how to manage assets in retirement and this means that decisions which must be made at the point of retirement can be challenging and confusing.”

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