RETIREMENT
RETIREMENT SHOULD BE ENJOYED, NOT ENDURED Retirees need income solutions that can provide spending confidence through retirement, says Jason Borbora-Sheen, co-Portfolio Manager, Ninety One Diversified Income Fund. With the average UK life expectancy now 82, one of the greatest challenges facing people living in the UK is the ability to fund a 30+ year retirement, while ensuring that their pension pot can support their expected standard of living. Future retirees need income solutions that can provide spending confidence through retirement. It is important to avoid not only drawing down assets at an unsustainable rate, but also underspending out of fear of outliving the pension pot. Decumulation strategies are steadily attracting attention; they delay the need to fully annuitise savings, but still provide an income stream while remaining invested, allowing the best chance of retaining some capital to eventually purchase an annuity or leave a legacy to loved ones. Understanding the relationship between assets, income and retirement goals is key. As we are living longer, in what is a historically low interest rate environment, flexibility is also required in the decumulation stage. To ensure a successful decumulation strategy in retirement, we encourage investors to consider three core elements.
1. WITHDRAWING A SUFFICIENT AND SUSTAINABLE INCOME During the decumulation phase of retirement, investors effectively convert a portion of their assets into income based on a ‘withdrawal rate’. It is important to determine a sustainable withdrawal rate (SWR) that prevents any income taken from fully exhausting the pension pot, thereby retaining the ability to purchase an annuity during a later stage of retirement. While there is no uniform solution to finding the correct withdrawal rate for an individual investor, we would argue that a sufficient income can be best achieved by investing across a diverse range of asset classes. In order to achieve a sustainable income, we believe investors should avoid aggressively chasing yields which can put capital at risk, and instead focus on resilient and natural yields that are backed by robust business models.
“Decumulation strategies are steadily attracting attention; they delay the need to fully annuitise savings, but still provide an income stream whilst remaining invested”
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