Arnhem Investment Management: The case for equities in retirement

Conventional wisdom would suggest that as you approach retirement you should move all your savings into income producing investments rather than leaving them in growth assets. Indeed there is a great deal of merit in constantly reviewing your mix of assets but one should not lose sight of the fact that the average life expectancy of a male retiring at age 65 is around 18.5 years and a female 21.5 years. In fact, around 1 in 4 men retiring at age 65 will live at least another 25 years (to age 90), while 1 in 3 women will live past that milestone.1

With a life expectancy of this length, many retirees’ greatest financial risk will be outliving their savings and having to rely on an unpredictable public pension.

This paper illustrates that many retirees may be better off maintaining a significant allocation to growth assets, in particular shares, rather than switching wholly to more conservative asset classes such as cash, bonds or annuities.

In the first part of this paper, we show that shares have been a sound hedge for inflation. We also show that over the long

term, shares generally provide more favourable outcomes than bonds (albeit with higher volatility). We then demonstrate that historically, a portfolio of shares has been on average a better alternative than a more conservative portfolio in retirement.

In the second part of this paper, we look at whether high yield stocks are the best source of sustainable income and show that companies that can grow their earnings sustainably are likely to be a better source of income over the medium term. We also look at the income generation of the Arnhem Australian Equity Fund (Arnhem Fund) over time.

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