Providing a sustainable income in retirement
- AuthorDaniel Elkington
You’ve done well, investing and growing your money in your pensions, LISA and ISA accounts and now you are wondering what investments will work best for you to provide a sustainable income in retirement.
The current generation of retirees are the first generation that know they will live into their 90’s, which means being careful with where money is invested – too much risk and a bad year can wipe out the income base, too little and the income dries up.
Option 1 - Invest your retirement savings, and use just the natural income provided to generate retirement income.
This means using a mutual fund (OEIC, IT, UT, ETF) that is invested in a broadly diversified portfolio of a variety of stocks, bonds, property and alternative assets like industrial metals etc.
Stock markets are volatile, but this generates returns, and you need to invest at least one-third but no more than two-thirds in stocks, with the remainder invested in the other assets described.
These sorts of funds will yield around 3% in the current marketplace and, because of the stock market exposure, have a fairly decent chance of achieving capital growth over time too.
In the portfolios I run, currently my clients are 52.5% exposed to stock markets as the returns from bonds is quite poor presently.
Given that the last decade has been one of the worst for investors, investing in such a strategy you’d still have been able to take a great level of income and survive crisis after crisis.
If you’re wanting a higher level of income, don’t simply look at the highest yielding stocks or bonds – we call these cheap investments and they may end up being cheap for a reason. That is not to say that they aren’t undervalued, but that much more due diligence is required to buy into a company that isn’t trading at a price you might expect.
On the other hand, as the old adage goes, cash is trash and relying on the guarantees provided by the banks and building societies will leave you very poor over time.
Option 2 - Pick an income level and review it often, try to resist change
The problem with option 1 is that you don’t know what you’re going to get.
If your stock portfolio has collapsed in value, this may be because one of the bigger investments has declared no dividend and relying on the natural income may mean that some months you come up short.
Option 2 allows you certainty – you know what you are taking out, you just don’t know how long for.
The easiest way to do this is to pick a portfolio as per option 1 and see what it is yielding. If the portfolio yield is, say, 3% and you take a 5% level of income; expect the capital to diminish in around 50 years.
How to invest?
The investments and asset baskets used to deliver income returns are the same in both options. For some clients we operate advisory model portfolios and currently the assets are allocated like this:
We do advise clients move assets around frequently, these are the returns we’ve achieved over the last three years;
The composite performance is calculated by Chattertons Wealth Management from information believed to be reliable but has not been independently audited. The composite performance has been calculated using financial express analytics.
26.7% over three years and 18.2% over the last year.
Predicted long-term growth rates: 4.2% above inflation.
Contact Daniel via email@example.com or call 01205 314126.