The value of protected investment growth

Recently, market volatility has been in the headlines and, for the 710,000 people who intend to retire within the next five years and the 4.2 million Australians¹ already retired, protecting one’s super or pension from extreme market fluctuations is a key priority.

We only need to look back to 2008 to understand why a defensive mindset is prevalent in older Australians. The impact of the GFC still haunts those who retired with drastically depleted super balances, and to this day serves as a cautionary tale for many who are approaching retirement.

With the multitude of unknowns that exist in retirement, it’s common to see a client’s risk profile shift to a more conservative attitude of minimising risk and creating greater certainty of income.

Growth vs protection: the trade-off

Like so many things in life, retirement is all about timing. In a perfect world, we’d all retire when markets are experiencing very little volatility. However, many people don’t have the luxury of choosing when to retire – in fact, almost 1 in 5 older Australians¹ are forced to stop working before they are ready to do so (usually due to job loss or redundancy, ill-health or to care for family members).

Research has shown that market conditions just before and at the time of retirement can have a significant impact on how long savings last – and can be the difference between living comfortably or living frugally in retirement.

A ‘retirement risk zone’ occurs around 7 years before retirement, when savings are at their highest level but are most vulnerable to market volatility.

Retiring during a period of positive returns enables income drawdowns to be fully or partially offset by positive investment returns.

On the flip side, if retirement coincides with a period of negative returns, retirees will be drawing down on a diminishing capital base. With less time to recover, falling asset prices can magnify the scale of capital losses; the larger the loss, the greater the gain required to get back to break-even:

Ultimately, any losses will diminish the total value of the remaining assets and will erode retirement savings at an accelerated rate.

Traditional retirement income products involve tough trade-offs between income growth and protection – with protection usually winning out, to the detriment of account balances.

Loss aversion

In behavioural economics, ‘loss aversion’ refers to a cognitive bias where a real or potential loss is perceived by individuals as more severe than an equivalent gain. To put it another way: the pain of losing $100 is perceived to be far greater than the joy of finding $100. 

A client who is in the accumulation phase generally does not feel the pain of an investment loss as acutely as a retiree:

Loss aversion can shape our behaviour, attitudes and decision-making. The tendency to prioritise avoiding losses over making gains goes a long way to explain a client’s preference to protect their nest egg rather than grow it.

A loss-averse mindset often results in retirees making sub-optimal investment choices, so it’s important to have products with protection and income certainty embedded into their features to manage the various retirement risks, and ultimately empower clients to feel confident and ­in control of their retirement.

Why is protected growth so important?

In Australia, we’re witnessing a significant demographic shift, with more people living for longer. This trend is expected to continue, with the number of Australians aged 85 and over expected to triple over the next 40 years². On the face of it, this increased life expectancy is great news, but with it comes the challenge of ensuring that our savings can support us over this increased lifespan.

As a result, there’s an urgent need for innovative products that provide retirement confidence, with core features that address key concerns, including:

• Growth – accumulate money for retirement and offer the potential for continued capital growth in retirement
• Protection – inbuilt downside protection mechanisms which limit risk exposure.

For this reason, it’s important to consider incorporating income streams that are designed for clients who are loss averse and help solve key retirement concerns such as sequencing, market and longevity risk.

AGILE: protected growth with income certainty

For retirees, having to weather market volatility is a daunting prospect; after all, the wrong decision now can have long-term implications for their retirement plans and lifestyle.

Allianz Guaranteed Income for Life (AGILE) is a new-era retirement income stream that delivers confidence in the form of a guaranteed income for life. Think of it as a protected ‘income sleeve’, which provides the opportunity for continued growth while minimising or eliminating negative returns as a result of market volatility.

Today, more than ever, retirees want the confidence to spend and enjoy the continuity of their lifestyle. To do so, they need to generate a regular income that has the potential for continued growth while being protected against the most extreme market fluctuations. Clients may also opt for AGILE fixed option; in which case the income will stay consistent; it will not decrease or increase over time.

AGILE provides the protection, certainty and flexibility that enables older Australians to enjoy the retirement they have worked all their lives for.

Learn more about AGILE’s protected investment options here.