The turmoil in Greece, hot on the heels of the financial crisis and the tech wreck before, may have future retirees scurrying to the safety of fixed income again but investors should keep their focus squarely on growth to avoid outliving their portfolios, a new report argues.
"Retirees should keep a significant portion of their wealth allocated to risky assets, like stocks, in order to provide enough growth over the long run and avoid prematurely depleting their wealth," Kurt E. Reiman, a strategist at UBS AG said in a note to clients.
At retirement, investors have typically been taught to become more risk averse by reducing their exposure to equities and other growth assets in favour of fixed-income securities such as bonds. Indeed, a well-worn rule of thumb is to allocate your age in bonds. In other words, at 70 years of age, an investor should hold 70% bonds, and 30% equities.
But traditional cookie-cutter retirement approaches that recommend reduced risk for all may not do the trick anymore.
"I use it as starting point, but many portfolios need more growth in order for people to retire on their own terms these days," Adrian Mastracci, a portfolio manager at KCM Wealth Management Inc. in Vancouver, said.
According to Mr. Reiman, a variety of societal trends has rendered retirement as we know it a thing of the past. As a result, that is creating new financial objectives for investors that are much more personalized in nature compared with the largely shared retirement mindset of the past.
"Pension plans, both public and private, face imminent funding pressure because there are fewer people working and more people retiring," he said.
"Medical costs and spending on health care services are on the rise as well, which burdens government finances even further. At the same time, people are anticipating longer active lives, with some form of employment potentially a part of the picture."
Mr. Reiman said these trends are not happening in isolation, but instead are converging to alter how people perceive their relationship to their career and how they plan to pay for the time when their careers end.
Faced with growing pressures to meet their spending needs, wants and wishes, retirees are also dealing with increasing levels of uncertainty and complexity related to financial risks, such as market volatility and inflation.
To combat these challenges, he said more portfolio growth is needed. He recommended a portfolio that includes stocks, commodities or real estate, highlighting two strategies that offer growth, but also provide a degree of safety for investors.
The first is a laddered approach of short-term bonds maturing over the next five years, and an additional growth portfolio for the longer run. "The main advantage of this strategy is that investors can weather storms on the financial markets, he said.
"The retiree has a period of up to five years before he/she has to sell assets from the diversified growth portfolio. Therefore, the investor is not forced to sell assets in a severe bear market, but can hold onto his/her investments until the market has recovered."
A second approach is to consider annuities as part of the solution, which can better address longevity risk.
Mr. Mastracci said most of his clients in retirement fluctuate between 40% and 50% growth exposure in their portfolios in order to meet their individual needs. However, like the UBS report, he stressed the importance of ensuring each portfolio provides some degree of emotional comfort.
"Some people may need some extra juice in their portfolio, but they have to be satisfied with the potential extra risk," he said.
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