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Retirement

Risk-free retirement no longer possible

risk-free retirement

Risk-free retirement was wiped out by the global financial crisis and retirees need to seek new sources of income in the current low rate environment.

The global financial crisis (GFC) put an end to the idea of risk-free retirement and retirees need to adjust their views on income to avoid negative returns in the near future, according to the head of a major exchange-traded fund (ETF) provider.

BetaShares chief executive Alex Vynokur said the current low interest rate environment was a unique event for retirees, who were being exposed to risks not previously experienced by that demographic.

“The GFC dismantled the concept of a risk-free retirement and we are living in unprecedented times,” Vynokur said.

“We have never seen the Reserve Bank of Australia interest rate at 0.75 per cent per annum – there is even talk of quantitative easing being used in Australia – and there are 10-year government bonds being offered overseas that have a negative yield.

“All this means there is no risk-free retirement anymore and things will be different for retirees than in the past who have opted for less risky investments as they age.

“The old sources of income, such as cash and debt, are giving negative yields and what worked before will not cut it anymore.”

He said this readjustment applied to SMSFs as well and high allocations to cash were creating a drag on portfolios.

“If you have 20 per cent of the portfolio in cash, it is actually generating a negative rate of return and pulling back on the portfolio, and there should be some type of reallocation to other investments,” he said.

He noted blue-chip investments rated highly with retirees and SMSFs, but questioned whether stocks such as the major banks would be able to generate the returns needed to fund retirement over the long term.

SMSFs were active users of ETFs to access ASX 200 shares, but an allocation to hybrid ETFs would allow them to retain that exposure but at a lower level of risk, he said.

Hybrid ETFs achieve this by holding a mix of hybrid securities, bonds and cash, and manage the risks associated with hybrids during particular market conditions by reallocating the portfolio to lower-risk securities or cash if the hybrid market is assessed to be overvalued or presents a heightened risk of capital loss.

Vynokur pointed out an Australian equities hybrid ETF also retained the franking credits available via directly held shares.

“Hybrid ETFs have their place as they offer returns, yield and franking credits, but there are times to not be too exposed when using them. That is the benefit of an active management overlay, which brings professional oversight, and so we know when it’s time to get out,” he said.

The BetaShares Active Australian Hybrids Fund was launched in November 2017 and recently passed the $500 million mark in assets under management.

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