Retired investors commonly face the dilemma that the more income they draw and spend now, the less is available to create future income. When inflation is added to this quandary, it becomes even more important to grow that income over time, so as to retain one’s buying power.
Capital preservation is ultimately dependent on two variables:
- The performance of the underlying assets (capital and income returns); and
- The extent to which income is drawn from the annuity
By maintaining exposure to the asset classes that provide the best hedge against inflation – equities and bonds/property – investors will be in the best position to keep income levels increasing. These assets need to be blended to achieve an optimal asset allocation within a balanced portfolio, whilst considering risk.
Preserving the capital base is key
We suggest that investors carefully examine their financial situation when contemplating using their capital to supplement income. We strongly urge investors to preserve capital until they reach a stage in their retirement years when it may become safe to reduce it. One of the methods of achieving this is to limit withdrawals to the level of income that their underlying funds produce, thus ensuring that their capital is preserved.
This approach is designed to ensure that investors’ capital is preserved throughout retirement. While investors may find it challenging to restrict their annuity income to the income produced by the investment choice, it is preferable to finding that one’s capital has been completely (or even partially) eroded. Rather be conservative now, than risk having to find another source of income (such as going back to work) or having to reduce one’s standard of living at some point in the future.