The proof is in the portfolio

The GFC may have seen a push for annuities, but a well-diversified portfolio, rather than just a defensive one, can hold retirees in good stead.

With interest rates plummeting from 7.25 per cent in 2008 to a historic low of two per cent earlier in May, self-funded retirees are feeling the pinch.

Fixed income firm FIIG Securities' research showed low interest rates had cost retirees $81 billion in lost income.

Low interest rates benefitted those with mortgages but for those over 55, whose mortgages were smaller and savings were larger, the losses amounted to $81.44 billion since 2008.

Those between 55 and 65 lost $13 billion, while those 75 and over lost $36 billion.

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Despite this, and the hunt for yield, people were still investing in the bond market, which Australian Unity senior investment specialist, Jody Fitzgerald, said was the worst place to be at the moment for high-yield chasers.

"You're not being compensated for the level of risk that you're taking. People are just looking at the headline yield number and thinking it's attractive," she said.

Fitzgerald feared that as rates or the yield in bonds started to rise as people traded out of these assets, they would see capital losses.

Eggs in multiple baskets

Retirees have to generate capital base via their investment portfolio through diversification across asset classes as their regular income ceased after retiring.

Instead of resorting to only a defensive portfolio, investors need a combination of Australian and global shares, domestic bonds, overseas bonds, and perhaps some property.

A manager should be benchmark unaware, invest in absolute return-style products, and have excellent stock selection skills, Fitzgerald said.

"The one thing that makes me nervous about self-managed super funds is that people are going to be tending towards shares that they know such as Westpac, BHP, and CBA.

"But at the moment that may not be such a wise decision because you've got this hunt for yield, the bank shares have gone up considerably in value," she said.

AllianceBernstein chief investment officer, Australian equities, Roy Maslen, said it was vital for advisers to guide clients through asset allocation, and realise that someone with large amounts of capital could afford to be conservative in their asset allocation.

However, someone with only $200,000 was going to need growth assets like equities to ensure they did not run out of money.

"I think on a case-by-case basis, obviously people will need to speak to their financial advisers but certainly when we've looked at a range of strategies, for example, in industry funds, it is quite common that having more equities exposure can increase the probability that your savings will last you a lifetime," Maslen said.

Maslen said the equity fund they were looking at was trading on some of the upside in the market to protect the downside.

"For example if you could ride 80 per cent of the market when the market's up, but only half as much when markets are down, then those kinds of strategies are very attractive to those kinds of advisers as they're looking for people moving into retirement or are retired," he said.

The FPA's Rantall said Australians tended to want to control their money until they got older, by which time they were willing to delegate, but it might be too late.

"Until people sort of really get up to the hard decision times, which really crystallises at retirement, they tend not to focus on those issues as much as they need to," Rantall said.

Read part one of Malavika Santhebennur's report: Riding out the retirement storm
Read part two of Malavika Santhebennur's report: The Annuity Ambiguity