Risk management could boost sustainable withdrawal rate
Retirees could increase the rate they can sustainably withdraw from their retirement portfolio by 50 per cent, through careful risk management, research reveals.
Actuarial consultants, Milliman, calculated that retirees in the US, who manage market risk, inflation risk, and longevity risk successfully, could sustainably withdraw six per cent per annum over the course of 27 years of retirement, instead of the traditional ‘four per cent rule'.
The research noted that in the current low interest-rate environment in the US and Australia, the traditional approach of moving assets from equities to fixed income was no longer an effective method of ensuring sustainable income through retirement.
"In the 1980s and 1990s, this approach was generally successful. Yields on fixed income assets were attractive relative to the risk levels that accompanied them," the report said.
"Today, however, relatively low yields, higher taxes, and market volatility have made it difficult for many retirees to generate income without taking on too much risk."
To tackle the challenges currently faced by retirees, the Milliman research found that the use of managed risk equities was a sustainable alternative.
"The outcome of addressing market risk and inflation risk via managed risk equities is a six per cent sustainable withdrawal rate, with a 94 per cent probability of success, over a 27-year planning horizon," the report said.
"For decades, conventional wisdom has said, ‘When the market goes down, ride out the storm. Eventually, the damage to your portfolio will be repaired'.
"In short, ‘Wait it out; and batten down the hatches'.
"For those nearing or in retirement, ‘wait it out' may not be the best answer. This group of investors is facing low yields and a domestic stock market at all-time highs, making it difficult to meet both income and risk management needs. Investing heavily in equities may expose this group of investors to untimely amounts of risk, while allocating to fixed income assets may not adequately fulfil income needs."
AUTHOR
Nicholas O'Donoghue
Recommended for you
AMP is to launch a digital advice service to provide retirement advice to members of its AMP Super Fund, in partnership with Bravura Solutions.
Unveiling its performance for the calendar year 2024, AMP has noted a “careful” investment in bitcoin futures proved beneficial for its superannuation members.
SuperRatings has shared the median estimated return for balanced superannuation funds for the calendar year 2024, finding the year achieved “strong and consistent positive” returns.
The second tranche of DBFO reforms has received strong support from superannuation funds and insurers, with a new class of advisers aimed to support Australians with their retirement planning.
