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Investments, Retirement

Longevity putting pressure on income investments

longevity pressure on income investments

Longevity in retirement will put pressure on income investments which are currently struggling to break even in a low-return environment.

Many retirees will spend more than a quarter of a century relying on their investments and need to look beyond income investments, which are currently struggling in a low-return environment, according to an Australian investment manager.

Ausbil executive chair and chief investment officer Paul Xiradis said the continuing downward movement of interest rates was not benefiting investors in cash-rate-linked investments, while  shares look attractive in that environment.

“Interest rates are not going up in a hurry and the real challenge for retirees and others who require income is they are not going to get that from fixed interest investments or deposits,” Xiradis said, adding low rates pushed the case for equity investments, which are expected to continue to do well over the next 12 months.

“The market is expecting earnings growth of around 10 per cent, which we think is achievable, but the composition of that will vary during the course of the year, and this compares to growth of 6 to 8 per cent that has been delivered in this financial year [2018/19].”

Ausbil Active Dividend Income Fund portfolio manager Michael Price highlighted low interest rates over the long term would have a wide impact on retirees due to increasing longevity.

“Why is growth important in this low-inflation world? According to the Institute of Actuaries, if a 65-year-old couple go see a financial adviser, there’s a 50 per cent chance one of them will get to 93. So, the halfway mark is 93 means the retirement midpoint is 28 years after the age of 65,” Price said.

“Low inflation over 28 years is significant, so you can’t focus only on income, but also have to look at total returns and growth as well.”

Answering the question of whether people should continue to hold investments in cash and fixed interest, he said the investors had to consider the returns and volatility of capital investments compared with the returns and volatility from income investments.

“Shares do have a volatile capital component, but they do offer secure income. The trade-off for income certainty from shares is capital uncertainty,” he noted.

“The question is are you living off income or capital, and if you are drawing down capital, then certainty then becomes important and you may want to be in cash or a term deposit.

“If you are not living off your capital, but living off an income stream, I struggle to see why you would not want to increase it,” he said, referring to active investments available via the fund he oversees.

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