When it comes to effectively structuring client portfolios for retirement, allocating investment capital to safer and less volatile asset classes is imperative.
Fixed-income securities including corporate bonds can play a pivotal role in providing much-needed portfolio stability and predictable income, reducing some of the inherent volatility associated with equity investing.
While fixed-income securities generally move inversely to equities, serving as a portfolio stabiliser in times of weaker markets, the predictable flows of income delivered via coupon payments also ensure retirees have greater financial certainty – which in today’s climate is increasingly important.
Rising Cost of Living
According to figures from the Association of Superannuation Funds of Australia’s (ASFA), the cost of a comfortable retirement increased 6.1% in the June quarter with the annual budget for now sitting at $70,806 for a couple over 65 and $50,207 for a single.
Additionally, separate research released just last week reveals that running out of retirement savings is now the number one concern for Australians aged over 50.
One of the key challenges facing financial advisers today is how to most effectively structure client portfolios which deliver sufficient real returns above the rate of inflation and without taking on excessive risk.
The Role of Corporate Fixed-Income in Retirement
Having a well-diversified portfolio is crucial in building long-term wealth and it is especially important for capital preservation as investors approach retirement.
While growth assets like equities and property can help drive portfolio growth in the accumulation phase, fixed income investments are designed to preserve capital while generating income.
Not only are prices of fixed-income securities less volatile than stocks, but they can provide a greater degree of certainty for income-focused investors given coupon payments are paid in regular frequencies, usually quarterly or semi-annually.
Additionally, while dividends paid to shareholders can often be scrapped in times of economic uncertainty, companies have a legal and financial obligation to continue paying fixed-income investors.
Not Without Risk
Corporate fixed-income securities are issued by companies with varying degrees of credit quality which influences the risk and return of a particular fixed-income security.
If an issuer defaults on their payment obligations under a bond or becomes insolvent, this is known as a ‘credit event’ and it can cause significant value destruction for fixed-income investors and in some cases, the principal invested can be completely lost.
There are also various other market and liquidity risks to be aware of, so it’s important to speak to an expert prior to investing into corporate fixed-income securities.
Speak to a Corporate Fixed-Income Specialist
Investing in corporate fixed-income securities can provide several benefits for clients approaching or already in retirement.
From a regular stream of income to greater portfolio diversification, fixed-income securities can play a pivotal role within investment portfolios and are currently offering very attractive yields.
Data as accurate as 25.09.2023
Disclaimer: Australian Bond Exchange Pty Ltd ACN 605 038 935 AFSL 484453 (ABE). This article is intended to provide general information of an educational nature only. It does not constitute the provision of personal advice and does not take into account your personal objectives, financial situation or needs. Before investing with ABE, you should consider the appropriateness of the investment to your particular financial and taxation situation and consider obtaining independent advice before making an investment. Examples in this article are for illustration purposes only and are not a recommendation to buy, sell or hold a particular investment. ABE makes no representation or guarantee as to the availability of a bond with the characteristics described in this article or that an investment made by you will generate the returns in the illustration. Past performance is not an indication of future performance. Investing with ABE is subject to our Client Services and Custody Agreement Terms and Conditions and Financial Services Guide.