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Christine St Anne is Morningstar's online funds and ETFs editor.

It's not surprising that investors have put a large part of their portfolio into cash. Retirees, in particular, are using cash as a way to protect their portfolios from the severe hits that have come from the recent market falls.

At a recent Morningstar exchange-traded fund (ETF) strategy day, Vanguard Investments senior investment analyst Paul Chin reminded investors that it was important they don't outlive their assets.

With the general population predicted to live beyond 90 years of age, asset allocation is crucial in ensuring retirees invest in a portfolio that matches their longevity.

Chin used some research from actuarial firm Rice Warner to explain how expenses and income requirements change during the three different phases in retirement: active, passive and frail.

Retirees in the active phase are 65 to 75 years of age. They enjoy activities that often include overseas holidays.

Retirees from 75 to 85 years of age face a passive lifestyle. Leisure activities are restricted and this is a period when many start to downsize their homes.

Retirees entering the frail state are less mobile, incur higher healthcare costs and often move to a retirement village.

"Often retirees adopt a set-and-forget strategy, moving their portfolio into cash and fixed income. However, the Rice Warner study shows retirees face different needs during the different phases of their retirement. Therefore, their portfolios should also address these different needs," Chin says.

Chin says it is important that retirees not only maximise their total investments, but also minimise their volatility.

"Investors should not take undue risk that could blow up their portfolio," he says.

Chin says a diversified portfolio suits "investors very nicely" and they can invest in a broad range of assets using the "bucket" approach, a common but effective management approach to investing. 

The bucket approach divides investment horizons according to the short term (one to three years), the medium term (four to seven years) and the long term (eight-plus years).

"These timeframes of buckets create the right mindset for longevity and allow investors to balance growth with their defensive assets," he says.

ETFs known for their low-cost, transparent structures can have a role in this investment strategy.