After several years of pandemic-induced financial relief limits to super caps, the Australian Government has introduced new drawdown requirements on superannuation, effective from 1 July 2023.

During the COVID-19 pandemic (over four fiscal years), the government temporarily lowered minimum drawdowns by 50%. While many continued to withdraw more than the minimum amount to cover the rising cost of living, 25% to 40% of members chose lower withdrawals*.

Now, as high inflation wreaks havoc on the global economy, and retirement costs soar up to $1 million*, these new drawdown requirements are offering retired Australians an opportunity to review their financial situations and benefit from investing in lower risk “defensive” assets, like fixed income. 

According to the most recent AMP Financial Wellness Report, more than half of Australians aged 65 and over (59%) are worried about their debt levels. A combination of the COVID-19 pandemic, health concerns, market volatility, and guilt regarding personal finances (26%), have caused a decline in the number of people who expect to live comfortably in retirement.

In response to these concerns, some retirees are starting to change how they manage their finances. According to AustralianSuper, retirees pulled $14 billion out of the superannuation system last quarter* as members made additional withdrawals to cover the rising costs of living or pay down debt.

Retirees struggling with rising living costs have an opportunity to benefit from higher-than-average yields on lower-risk fixed income investments, to help cover the rising cost of living.

Clients of the Australian Bond Exchange can invest as little as $10,000 into fixed income securities, to generate an additional stream of predictable income throughout retirement.

For example, by investing $10,000 into a bond-linked security (with a bond price of $100) that has a 7.5% coupon (and you hold it to the maturity date in four years' time) your investment will generate $3,000 total income to cover the rising costs of living, excluding any potential capital gains or losses.

Retirees who built substantial savings buffers during the COVID-19 pandemic can also capitalise on lower-risk, higher yield fixed income investment opportunities to generate above average returns.

Drew Meredith, a private wealth adviser*, told the Australian Financial Review that retirees over the age of 75 who don't need the additional funds can recreate their super portfolios into a new personal fund, providing flexibility and control over investments according to individual needs.

For instance, investing $500,000 into the same security mentioned above (7.5% coupon, a bond price of $100, that matures in four years' time) would generate $37,500 per year, and a total income of $150,000 if held to maturity, excluding any capital gains or losses.

Super fund managers are reevaluating investment strategies, shifting billions of dollars into to lower-risk assets such as bonds and fixed income.

AustralianSuper, the country's largest super fund, has adjusted its allocations to mitigate potential risks associated with a looming recession. By redirecting investments from higher risk assets like property (which experienced a loss of 7% in the last financial year), the fund is embracing the stability and growth potential of fixed interest, cash and bonds.

Mark Delaney, the chief investment officer of AustralianSuper, recognises the value of bonds as a "bit of a hiding place" and has significantly increased bond investments by $37 billion (a remarkable 70% surge*) since last year.

However, AustralianSuper is not the only fund that believes that in the emergence of a weaker economic environment, fixed interest investments will perform well. HESTA, an industry super fund, is also reallocating assets away from higher-risk positions, as current equity valuations face the scrutiny of top investment firms.

For retirees seeking financial security and growth, fixed income offers a compelling solution. If you'd like to learn more about how you can make the most of the jump in fixed-interest yields, watch the free webinar here.