Retirement portfolios: Solutions for a new world

By Jayson Forrest

Julian Lefcovitch (North) and Oliver Ge (Pendal) discuss the challenges facing retirees, and provide key considerations for advisers to help them navigate the complexities of retirement planning.

With around $4.2 trillion in assets (as of December 2024), Australia is the fifth largest pool of investable retirement savings globally, making the Australian superannuation system the envy of the world. However, as a new generation of workers — who have benefited from compulsory super contributions their entire working lives — begin to retire, the superannuation system is about to enter a new phase.

According to Julian Lefcovitch — Wealth Management Product Specialist at North — while the current generation of retirees are facing the same problems as generations before them, such as being able to fund a suitable level of retirement, he argues the current environment of market uncertainty and geopolitical instability, make retirement planning particularly challenging for the current cohort of retirees.

In a panel discussion at the 2025 IMAP Portfolio Management Conference in Sydney on ‘Retirement portfolios: What they should look like and why’, Julian says that with increasing life expectancy, rising cost of living pressures, potentially lower interest rates, and high levels of market volatility, these factors are all combining to create a more complex investing environment for the current cohort of retirees compared to previous generations.

“In a world of uncertainty, the need for good quality financial advice is essential,” says Julian. “With approximately 700,000 Australians retiring within the next five years, if you’re an adviser, it’s a great time to be in the industry. This generation of retirees is the wealthiest that Australia has ever had. They have a lot of money and assets to protect, and they need advice.”

For Julian, when building retirement solutions against this backdrop of heightened global uncertainty, there are a few key considerations he believes should always be front of mind to help mitigate the risks that retirees face. These include: longevity risk, market risk, and sequencing risk. He also emphasises the importance of thinking about emerging trends, as well as retiree preferences, when building solutions.

“At North, longevity risk is top of mind for both our clients and us. We want to give clients the confidence to spend their money in retirement. However, the challenge is making their money last the distance, as this generation is typically living much longer than previous generations.”

According to Julian, retirees generally react to longevity risk by drawing the legislative minimum and underspending in retirement. He says they have a real fear of running out of money because it’s simply too hard to predict how long they’ll live. As such, Julian believes there is a real need for product providers to rollout solutions to address longevity risk and for advisers to develop suitable strategies for their clients.

And while clients generally understand market risk — where their investments either increase or decrease as a result of volatility and unpredicted movements in market valuations — it’s different for sequencing risk, which Julian refers to as the “silent assassin”.

Sequencing risk — the risk that the order and timing of a client’s investment returns are unfavourable, resulting in less money for their retirement — can have a devastating impact on a client’s portfolio.

Julian says there are two key ingredients in sequencing risk: high levels of market volatility, and negative cashflows. And while this isn’t so much an issue in accumulation phase, in contrast, these factors can have a disastrous impact in the drawdown phase at retirement.

To help address these key risks in retirement, Julian says there is a growing preference amongst retirees for products that offer capital protection and stable returns. However, stable returns often means lower investment risk, which means a lower level of return. So, in an environment of rising costs and longer life expectancy, capital protection may not provide the returns and level of income growth that retirees need to fund their retirement. 

However, Julian acknowledges there is a need to consider capital protection as part of an allocation in a retirement portfolio to help protect clients against losses. He says there are some products in the market that enable clients to have exposure to growth assets, but with downside protection.

But he warns capital protection comes at a cost, which needs to be considered. “If the need is for stable returns, then think about how you’ll deliver that without completely moving away from growth assets and the returns that come from those assets.”

According to Julian, advisers who use capital protection are generally not committing the entire portfolio into a capital protected product. Instead, they may opt for a bucketing strategy, where a capital protection product is used in the defensive bucket, while an SMA could be used in the growth bucket.  

In fact, Julian believes a great way to manage sequencing and market risk is through managed accounts, which provide advisers with the ability to outsource investment management. He says by using an SMA structure, investment managers can take advantage of any upswings or downturns in the market and quickly rebalance portfolios when markets move. This provides some protection to clients.

To address some of the key challenges facing retirees, like stability of income, Pendal developed the Monthly Income Plus Fund, essentially an absolute return income fund that has been designed to address key retirement risks. According to Oliver Ge, CFA (Portfolio Manager at Pendal) the fund was developed in response to investor needs, particularly in relation to: steady regular income, daily liquidity, growth, and capital protection.

The fund has been designed for investors who want the potential for regular income and some long-term capital growth to protect against inflation, as well as diversification across a range of asset classes, and some variability of returns. The fund invests in a number of income generating strategies across a range of asset classes, including fixed interest, shares and cash, while derivatives may also be used.

“We’ve tailored this strategy specifically for retirees,” says Oliver. “Over the 15 years we’ve been running the fund, it’s been quite successful. It’s produced over 180 consecutive months of successive income, with franking credits, and since the fund’s inception, it has generated 2.5 per cent above cash in terms of alpha. The fund has only suffered one year of negative returns.”

Oliver says clients typically use the fund in one of three ways:

• As part of a bucketing strategy, where the fund is put into a liquidity cap, allowing clients to drawdown as needed, while allocating the rest of their capital to other high growth strategies, like Aussie and global equities.
• Clients use the fund in their fixed income sleeve, as Pendal has a successful track record of picking interest rate cycles and making duration decisions.
• Clients may put the fund in an alternatives bucket, because of the fund’s low correlation to traditional bonds or equities.  

With today’s cohort of investors expecting to enjoy a longer time in retirement phase than previous generations, the ability for them to not only protect capital but also to continue to grow it is absolutely essential. So, does this mean for a retiree who may have a 25-30 year investment time horizon ahead of them that daily liquidity of their investments is less important?

“It’s a good question,” says Oliver. “The need for daily liquidity varies from client to client. There are clients who definitely need regular access to their capital, whether that’s for travelling, helping out their children, or buying big ticket items like a car. So, for these clients, liquidity is extremely important.

“But for those clients who have a particularly long investment time horizon of 20-30 years, then daily liquidity is probably not as pressing. These investors might consider accessing illiquid and high yielding assets, like private credit, where their capital is locked up for a period. However, for clients who want regular access to their capital, then daily liquidity is important. They cannot afford to have their capital locked away.”

Over the last 30 years, account-based pensions and annuities have been the two key tools advisers have traditionally relied on when building retirement strategies. However, Julian says the market is now starting to see the emergence of new and innovative retirement income solutions, which provide greater flexibility in investment choice.

“Some of these new hybrid solutions hitting the market — which provide the ‘asset test discount’ and deliver income for life — are interesting,” says Julian. “As an adviser, it means you can combine offerings, including a managed account, and not be locked into a particular investment solution. That will provide advisers with greater flexibility around how they design portfolios for clients. It’s definitely worth checking out some of the innovative retirement income stream products available in the market.”

Oliver agrees. He says with annuities there’s always a natural trade-off. The more ‘bells and whistles’ you want — like inflation protection — the lower the yield you’re going to get. Everything a client adds on, eats into their income return.

“However, through products like our Monthly Income Plus Fund, we are kind of able to replicate what the annuity providers do by providing something similar to stable income with a little bit of volatility but also a lot more upside,” says Oliver. “In a new world with added complexity, it’s time advisers look at the new breed of innovative retirement solutions to help their clients better navigate this new world of uncertainty and a longer time spent in retirement.”

Julian Lefcovitch is Wealth Management Product Specialist at North; and Oliver Ge, CFA is Portfolio Manager at Pendal.

They were part of a panel discussion on ‘Retirement portfolios — What they should look like and why’ at the 2025 IMAP Portfolio Management Conference in Sydney.

The session was moderated by Vaughan Hain — Financial Adviser and Portfolio Manager at Ethinvest.