As investors approach retirement their saving priorities change from growing their pension pot to preserving it. Traditionally this has seen retirees move from higher risk equities to safe and reliable bonds.
However, in the current environment, Legg Mason Australian equities chief investment officer, Reece Birtles warns that ignoring equities could compromise retiree’s standard of living.
“Investors are spooked by the split personality of equity markets. On the one hand retirees should be embracing equities because of Australia’s strong corporations, high dividend yields and favorable tax structure, on the other hand they are shunning it because they are reminded of the complicated derivatives and products that contributed to the financial crisis,” he said.
He added that the strong Australian economy, low interest rates and one of the highest dividend yields in the developed world means that SMSF investors should be rethinking ongoing high allocation to cash by diversifying into an equity strategy designed to meet the financial needs of retirees.
Birtles said that rather than dialing down the equity investment, retirees require an exposure of more than 50% to growth assets including equities to keep up with an inflation rate of 2.5% over 20 years.
“Over a 15 year timeframe, dividend yield has outperformed returns from share price, and Australia’s tax structure makes dividends doubly attractive for retirees as dividend franking can add over two per cent to the yield for zero rate tax payers to further increase the dividend stream,” Birtles explained.
The Legg Mason Australian Equity Income Trust fund is designed to give investors access to stocks with a sustainable yield and high quality characteristics.
Since inception it has returned 9.4% pa income and 12.2% pa with capital gains included. This compares to the one-year term deposit rate which has fallen from 6% to 4.15% over the same period.
By: Mark Smith