Part of the solution to make the required trade-off between an adequate current and future income is to optimise asset allocation as far as possible. An appropriate balance between investing for growth in the long term and capital protection in the short term must be achieved.

To illustrate why we argue for an appropriate balance between income and growth assets in a post-retirement income portfolio, consider the ‘actual impact of inflation analysis’ in Figure 10. This table compares the actual results that would have been achieved by investors drawing different levels of income from two portfolios with differing risk profiles. The first option is a very conservative income assets only portfolio; the second is a moderate risk income and growth portfolio, with a roughly even split between income and growth assets over time. We have used the average money market fund for the first option, and Coronation Capital Plus Fund as an example of the latter. The analysis is performed for the period July 2001 (when Capital Plus was launched) to 31 March 2016. Over this period, the average money market fund returned 7.9% p.a. (after fees), with a very low standard deviation of 0.7%, while Capital Plus returned 13.5% p.a. (after fees) at a standard deviation of 7.0%.

The first point to note is how quickly inflation erodes purchasing power. The table indicates that, if you drew an annual income of R70 000 in 2001, you need R167 013 to buy the same basket of goods and services today. The second point is that Capital Plus (the portfolio with roughly 50% invested in growth assets) was a lot more effective in generating income over the period, regardless of the initial income rate selected. For example, if your initial income rate was set at 5% in 2001, today you would still only draw 6.8% from Capital Plus, while your income requirement from an average money market fund would be 14.6%. Finally, it should be noted that a starting income rate of 9% selected 15 years ago (in an era when money market funds yielded 10%+) was too high even for a portfolio with adequate growth assets and below-average risk levels, as the required income to maintain the initial standard of living now exceeds the maximum allowed income drawdown rate.

 

 

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