Retirees need to manage tail risk

Managing tail risk is vital for serving superannuation fund members in the retirement phase, a whitepaper from Wheelhouse Partners has found.

The paper showed that managing tail risk is important for anyone not in the accumulation phase, as they need regular income to fund their lifestyle and ongoing obligations and liabilities. It said that this was important in a financial environment in which financial crises are increasingly commonplace.

The paper highlighted sequencing risk, behavioural loss aversion, and diversification and liquidity as the key reasons why managing tail risk is important to members in retirement.

Wheelhouse Partners managing director, Alastair MacLeod said that advisers needed to consider that retirees have different needs when considering their investments.

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“Advisers and their clients must recognise the very different objectives of retirees, and adjust their portfolios with appropriate tail risk management strategies to accommodate longevity risk,” he said.

“As people approach and enter retirement, their financial course is unknown but already largely set. Their outcomes are dependent on the future returns with which they will be presented.”

With traditional approaches to managing tail risk, such as using cash, becoming increasingly ineffective, MacLeod said that there are alternative solutions. He pointed to exposure to the growth of equity returns by reshaping those returns and thus reducing risk as a possible rail risk management strategy.

The whitepaper suggested that equities could provide a source of liquidity during periods of financial crisis, as compared to risks in other asset classes which tend to correlate during crises.