This post was originally published on this site.
Aging demographics, longer lifespans, and shrinking defined-benefit pension coverage are driving a growing demand for specialized post-retirement investment advice, says Jack Delany, senior portfolio manager with Keyridge Asset Management.
Speaking on the latest episode of the Soundbites podcast, Delany said today’s seniors have a unique set of needs, objectives and risks — all of which require dedicated solutions.
“Retirement investing is different,” he said. “Pre-retirement, you primarily focus on things like volatility. Post-retirement, you become very, very focused on things like drawdown mitigation, inflation and that need for income.”
He pointed out that by 2032, about 35% of Canadian households will be headed by Canadians aged 65 and older. The combined value of their financial wealth is expected to exceed $4.8 trillion.
Managing that money will require strategies that go beyond the standard approach for younger investors. Most notably, sequencing risk and longevity risk pose a very real threat to the financial health of retirees.
Large withdrawals or losses early in retirement — in what is referred to as the Retirement Risk Zone — can be particularly impactful because there is less time and money available to rebuild a portfolio that was likely near the apex of its value.
“One of the key implications of living longer is that retirees are going to need their savings pot to last longer,” he said. “Generating return means taking some risk. Taking some risk can result in drawdowns. So, getting that balance right between risk and return is absolutely critical, and it’s one of the key elements of successful retirement portfolio design.”
Delany said diversification and strategy selection are going to be the vital tools. He advocates looking at multiple sources of return, asset classes and regions.
“That could be combining something like a higher-yielding equity strategy alongside more traditional yield-generating assets, like in the fixed-income space,” he said.
In terms of strategy, he said retiree investing requires an approach that can protect on the downside, while still allowing for growth potential.
Delany said people often associate derivative strategies with increased leverage and risk, but there are ways to use derivatives that actually reduce risk. In particular, he employs a calendar collar strategy.
“It buys put options to mitigate some of that risk of market decline,” he said. “It’s a strategy that can deliver growth with downside mitigation, and then, depending on how you structure it, positive net income. Three really important features for retirees.”
He also utilizes call overwriting, which doesn’t have the same focus on downside protection, but has a greater focus on income yield.
“You go long equities — which gives you some growth potential — and then you sell some call options on those equities. Selling those call options generates income,” he said. “These strategies could be structured to deliver an income yield of 4% to 6% for example, while the dividend yield on global equities is about 1.5% right now.”
He insisted that well-aligned strategies are by no means limited to the derivative space.
“Within equities, we can also think about high-dividend strategies, for example. Again, targeting that higher yield with the potential for growth. Defensive equities, like low-volatility equities can help with drawdown mitigation.”
Inflation protection is another key post-retirement need.
“Retirees are fully dependent on their assets to help them manage inflation risk and preserve purchasing power. So, while an investment solution can’t fully protect against inflation risk, allocating some capital to assets that can protect against elevated or volatile inflation can help,” he said.
“We’re not talking about a whole class of different securities here. We’re still using those same core building blocks: equities, fixed income, real assets, etc. But we’re using them in a different way,” he said.
**
This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.