Search for yield for retirees

Thursday, July 24, 2014

As things begin to “normalise” after the gyrations of the GFC it is timely to reflect on the structure of our income stream investment portfolios.

A portfolio that was set in a balanced manner prior to 2008 would more than likely have had most of its defensive assets used up via income payments during this period.  In addition it could still be sitting with a very high exposure to growth assets.  If that is the case, it is not such a bad thing as our Australian shares have recovered significantly since March 2009, and most good international share funds had returns of around 40% through the 2013 calendar year.

If this scenario strikes a chord with how your pension fund is bubbling along it may well be good timing to review the balance of your investments and look at the volatility exposure within them. In doing it is important to look for assets that will give you a reasonable yield, with a high probability of little downside volatility.

A well constructed portfolio that will provide opportunity for long term growth and limited chance of volatility would be the ideal.  There should be a mid-tier layer of defensive assets and this might be invested in medium term securities. The remainder of the fund should be invested in cash and term deposits so that it is easily accessible to provide your income supply, as well as extra cash for unplanned surprises.

The income yield from your share funds should be typically around 3%-5% p.a. and the asset will largely remain untouched as it is really there as a hedge against inflation. The smallest part of the portfolio is in term deposits and cash, which are going to have limited returns.

The idea is to squeeze as much yield as possible from the mid-tier assets. A traditional asset to fill this space has been Bond Funds or buying direct long term government bonds. Bonds are a misunderstood asset by many and can in fact be very volatile.

A less aggressive solution for this asset is to use what can be described as enhanced yield managed funds. Unlike a bond fund invested almost solely in medium and long term bonds these invest in cash, short term corporate bonds and hybrid securities. There are a number of these that have been around for 10 years or more and have total returns between 1.5% and 2% higher than term deposit rate. Typically the income is higher than Term Deposit rates and there is some capital growth.

Research done in the US over the last couple of years shows that an income stream with assets structured effectively should be capable of supplying an income stream of up to 6% per annum for the life time of the recipient, considering it is managed ongoing.

A financial adviser will be able to reassess your investment strategy and make recommendations for your individual needs and circumstances.