Keynote by Rod Thomas FCA
Just a couple of days ago I read a detailed report from Old Mutual Global Investors, one of our oldest and most respected fund managers, which talked about what they perceive as the three biggest risks that people face in retirement, specifically around their investment strategy.
In this article, I’m going to explore and unpick those three risks which I am in total agreement are of huge significance. So, what are they?
- Flexibility – the need to cope with changing income requirements
- Volatility – the need to avoid major capital losses
- Inflation – the need to protect yourself against the impact of inflation
Let’s explore these in greater detail:
As we go through the retirement cycle until we ultimately depart, it is true that most retirees need for income can vary considerably. For the first 10 years after retirement you may wish to travel the world, spend more time attending cultural events or helping children get on the property ladder. Then, in your next 10 years you may find that increasing age restricts your plans and as such you spend more time closer to home, doing less. And as a result, your income needs are less.
So, flexibility in income terms is critical. We agree with the problem, but within the traditional financial services market it’s difficult to find a good solution. Here’s a few reasons…
If you have a pension and take an annuity, which has been the default position for many years, then you will receive the same income each month (possibly adjusted for inflation) until you die.
Or if you purchase long term government bonds with their fixed income, that doesn’t work either.
And finally, if you rely on a share portfolio for income you face potential shortfalls if the companies cut or don’t pay dividends, and if you sell shares to provide income you progressively weaken your portfolio for the future.
With the major asset classes, volatility of shares is a major worry for retired investors. Typical share cycles are 10-15 years. So if you happen to hit a bear market shortly after retirement, your savings can be decimated for a considerable time.
The alternative offered within mainstream financial services is to offer you fixed interest bonds, which does remove volatility. Problem is the substitute is an appallingly low rate of interest which doesn’t even cover inflation, let alone any decent level of income.
So whilst it is absolutely right to say that volatility is a major enemy for investors in retirement, it is also true to say that there are no good solutions within traditional investors sectors.
If inflation runs at 3% a year, it will halve your capital value in about 25 years. This is truly scary for someone in retirement. Whilst you were working your income, by and large, went up with inflation. And pension contributions, often pegged to your income, also increased proportionately.
Now you are retired your income is fixed to whatever level of savings and investments you had when you retired. And therefore, the need to deal with inflation is paramount.
Let’s assume that inflation hits its long run average of about 3% p.a. in the UK. And you want to draw an income from your portfolio. I’d say a modest 5% would be less than most of us would be comfortable with, but for the moment run with that. Taken together, your portfolio needs to yield 8% p.a. to cover inflation and allow a 5% drawdown of income.
And that’s without factoring in any fund charges which can often be 1% p.a. or more.
In reality we are talking about a 9% p.a. yield to provide a 5% p.a. income. So let me ask you, how close to that does your portfolio deliver, on a regular basis?
Again, I have to say that current stock market yields, fixed interest yields and even the net income derived from many property investments fall far short of delivering the income that you need.
The solution is the F.R.E.S.H investment strategy
At Avantis Wealth we have developed an investment strategy that delivers:
- Fixed income – removing volatility
- Rewarding returns, typically 7% – 15% annually – providing for inflation and more
- Exit strategy in place – so you have flexibility when your needs change
And there are other benefits like having security in place to cover your investments, and no need (as there is with property investment) for your involvement.
There’s much to tell you about the F.R.E.S.H investment strategy. We invite you to request our complimentary special report which explains all. You’ll find out how investors in retirement can avoid the three biggest risks exposed by Old Mutual and enjoy more of the financial certainty they desire.
To request your complimentary copy just email email@example.com or call + 44 1273 447 299 or complete the form here.
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As always this article is not to be deemed as advice. It is the writer’s personal opinions. No decisions should be made based on the contents of this article but further professional advice should be sought from a regulated financial advisor.
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