Retirees must not deplete their capital

Brian Vambe

Retirement can be daunting: it’s a time to make financial decisions that will impact your lifestyle for the rest of your life.

Typically the more income one draws and spends today, the less one can draw in future.

When inflation is added to this quandary, it becomes important to also grow that income over time to retain one’s buying power.

A six percent drawdown rate is common but Marriott’s research shows that at that rate, almost half of retirees would have depleted their capital within 30 years.

The concern is that markets are volatile and returns are expected to be below average for the foreseeable future.

This suggests many living annuities will come under pressure in years ahead.

Suggestions for investors:

Match the income drawn with the income produced.

Investors should be aware of how much income their portfolio is generating and try to draw no more than the income produced, thus avoiding capital erosion.

Investments that produce reliable, consistent income streams assist in matching income drawn with income produced.

If an investor can avoid drawing more than what their investment produces they can secure their future income.

This is especially important in the early stages of retirement.

If investors wish to draw more than what their investment is producing, they should know they’re eroding their capital

Choose investments which produce consistent income streams that grow.

Investors need to ensure they protect themselves against the impact of rising living costs.

Investments which produce reliable income streams that also grow over time, like equities, are critical for a successful retirement.

By including the right equities, those which have a reliable growing, inflation-hedged income stream, investors will be able to ensure growth in their investment income over time.

The trade-off of including equities, however, is that initially an investor’s portfolio will produce less income.

Investors need to find the appropriate level of exposure to the different asset classes that will give them enough income and income growth over time.

We suggest investors examine their situation carefully when considering using capital to supplement income.

Rather be conservative now than risk having to find another source of income or having to reduce one’s standard of living in the future.

Brian Vambe is an investment professional at Marriott.