Cut and cut hard. If the recent rhetoric from Canberra is anything to go by this month’s Budget sounds like it’s going to be a barrel of fun. But as the Treasurer prepares to put the mean into means testing, it’s fair to say that some important decisions need to be made in regards to the sustainability of Australia’s fiscal future.
As our population ages, the affordability of pensions, aged care and healthcare on government coffers is sure to come into focus. In a recent speech, Treasurer Hockey quoted a recent IMF report noting that based on current settings, an extra $93 billion of government spending per annum would be required by 2030 on pension and healthcare expenses alone. That’s more than all the revenue currently collected by the GST.
Talking ‘bout my generation
To ease the pressure, one worthy consideration is a further increase to our retirement age. Already you can hear the cheers from various sectors of the workforce, but as we consign the age of entitlement to our history, we can at least find comfort in our entitlement to work longer.
With the era of personal responsibility now upon us, our independence and wealth must match that of our longevity.
Pleasure and pain
So how do we provide for ourselves? It’s not as though financial markets are making it any easier for us. Cash rates currently remain at record lows and bonds have their own set of challenges. And while equities have recovered since 2008, valuations are not exactly cheap; everyone now appreciates market risk.
To this end, retiree portfolios should focus more on long term objectives – achieving outcomes and managing risks accordingly. Outcomes should include a diversified portfolio’s ability to preserve its capital base. They should also generate sufficient income to cover expenses, weighed up against the familiar risks of longevity, sequencing and inflation. From our perspective, an equities component that helps keep your risks between the flags is a sensible inclusion.
Behavioural finance tells us that investors understandably feel twice the pain of losses compared to the pleasure of gains. Those who argue that some downside equity protection is not important are simply ignoring the needs of many retirement portfolios.
Retirement portfolios need not take undue risks and solutions that generate income and provide some downside protection can help sing the blues away.
Patrick Noble is a senior investment strategist at Zurich Financial Services and regular investment market commentator with over 15 years’ experience in financial services. Patrick is responsible for Zurich’s diversified funds including manager selection, asset allocation and chairing the funds’ Tactical Asset Allocation Committee.
