60/40 strategy leaves women retirees in “greater financial strain”
New research from Monash University has re-affirmed the need for more flexible retirement planning especially for women, revealing the traditional 60/40 investment strategy places them under “greater financial strain” than men.
The report, The Future of the 60/40 Allocation: Modelling the Performance of the 60/40 Portfolio in Retirement, used digital modelling to test how the traditional 60/40 strategy – which allocates 60 per cent of savings to equities for growth and 40 per cent to bonds for stability – would meet Australian retirement benchmarks over a 25-year period.
The modelling took into account both the comfortable retirement standard of $53,289 a year and the modest standard of $34,522 for singles, and found women – who typically retire with lower superannuation balances than men and had access to “fewer external income streams” – were more likely to “run down their savings earlier, especially if aiming for a comfortable lifestyle”.
“The 60/40 strategy only works well when several conditions align, such as higher savings balances at the start of retirement, modest lifestyle expectations and positive early returns,” Dr Bei Cui, Senior Research Fellow at the Monash Centre for Financial Studies (MCFS) at Monash Business School and and lead author of the study, said.
“Many believe the 60/40 portfolio provides a safe balance, but in practice it does not deliver the same security for everyone, particularly for women who begin retirement at a disadvantage.”
The study, conducted in association with the US-based CFA Institute, also suggested that leveraging a single investment approach, such as the 60/40 method, would not suffice when planning for retirement.
“Portfolios for both men and women are hit hard if investment returns are poor in the first years of retirement, but since women’s balances are typically smaller, their portfolios are likely to deplete faster,” MCFS Deputy Director and co-author of the research, Associate Professor Ummul Ruthbah, said.
“Our study showed that female retirees are more vulnerable because they often start with lower balances and lower ongoing benefits. This puts greater pressure on their portfolios and increases the risk of running out of money,” Associate Professor, Nga Pham, said.
The report made several recommendations including:
- Allowing withdrawal strategies that adjust to market conditions;
- Implementing greater financial literacy to help retirees, particularly women, understand the risks and trade-offs;
- Integrating additional financial resources, government benefits, and tax considerations into retirement planning; and
- Introducing government policies to improve financial literacy among retirees regarding the complexities of retirement income planning.
Interesting they needed a study to figure things out. Did they write the conclusion before the study?
Yes it hurts smaller balances more as drawdowns get bitten into harder.
To focus the headline on women though Is a misrepresentation. Further ‘allowing withdrawals that adjust to market conditions’, given often the best thing to do is that opposite of what you want to do (ie selling at the top of a bull mkt and buying after a heavy fall) allowing ‘punters’ to change their AA is likely to eviscerate savings much more quickly. Especially men as they are more prone to changing, women are often the more patient investors.
Yawn, more divisive, gender driven, taxpayer funded, university “research”.