How to futureproof your retirement income

Savvy investors share how to futureproof retirement income by investing defensively.

How to futureproof your retirement income

The falling cash rate has put a scare through many an investor, but some have taken matters into their own hands and are offering advice to others on how to safeguard their retirement income.

Clever investors are investing defensively, that is, focusing on generating income rather than on capital gains.

A defensive investment strategy is aimed at minimising the risk of losing principal. A defensive investor would regularly rebalance their portfolio with high-quality, short-maturity bonds and blue-chip stocks. They would also ensure that they have diversified investments across sectors and countries and hold cash and cash equivalents in down markets. This would protect an investor against significant losses from major market downturns.

According to Investopedia: “Defensive investment strategies are designed to deliver protection first and modest growth second. With an offensive or aggressive investment strategy, by contrast, an investor tries to take advantage of a rising market by purchasing securities that are outperforming for a given level of risk and volatility. An offensive strategy may also entail options trading and margin trading. Both offensive and defensive investment strategies require active management, so they may have higher investment fees and tax liabilities than a passively managed portfolio. A balanced investment strategy combines elements of both the defensive and offensive strategies.”

Defensive investment strategies are ideal for retirees without steady salaries, as they are aimed at protecting existing capital and keeping pace with inflation through modest growth.

The best time to consider defensive investing is close to retirement age, particularly when markets are volatile.

“In the decade before retirement, people should start to think about changing their exposure from direct equities or just normal managed funds into defensive equities. Then, by the time they are in retirement, their defensive equity should be a much higher proportion,” Aaron Binsted from Lazard Asset Management told NestEgg.

Defensive equities generate income as well as protect capital and savings, as they’re not prone to rise and fall with market highs and lows. The best shares are typically found in reliably funded industries such as healthcare and energy suppliers.

“It gives people a good level of income into the future and, secondly, it can really manage those negative sides of equities that people worry about – dividend cut risk, high volatility and significant draw down in negative markets. Defensive equities are all about managing and lessening those. In the seven years we have managed the funds in every negative month of the ASX200, the fund has only fallen 51 per cent of the market’s drawdown, ” said Mr Binsted.

Do you invest defensively?

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