2018 The Income And Growth Challenge - September 2018
2018 SEPTEMBER: THE INCOME AND GROWTH CHALLENGE
The choices investors face in, or near, retirement - September 2018
Investors who are near or already in retirement face the most challenging of investor needs: simultaneously investing for both immediate income and long-term growth. The key challenge is to ensure a sustainable standard of living by balancing the needs of today with those of the future.
In this issue, we discuss the key issues that you will encounter in managing your post-retirement capital, propose our solutions aimed at addressing these needs and share strategies to manage the trade-offs that need to be considered in ensuring appropriately prudent retirement income planning.
In recent years, we have warned investors to moderate their expectations for long-term returns, and to make sure that they are not withdrawing more from their living annuities than can be sustained. While we continue to hold the view that an initial drawdown rate of below 5% p.a. is a good starting point, we are more optimistic of future returns from these levels and believe the disappointing equity returns of the last three years are not the new normal. In fact, we believe investors need to consider keeping a healthy exposure to equities, which should remain the largest driver of investment growth over time.
Most retirement savers consider two options when it comes to purchasing a compulsory post-retirement income: a traditional guaranteed annuity or a living annuity (see Figure 1 below). A guaranteed annuity guarantees a pension for life, while a living annuity provides no income guarantee, but offers the potential for capital growth. A third, relatively new option is the hybrid annuity which combines features of guaranteed and living annuities. Hybrids typically guarantee an income over the lifetime of the investor, with some potential for income growth, and a degree of flexibility in terms of drawdown rates. However, the choice of underlying investments is often more limited than with a living annuity and the percentage of capital that can be drawn down is restricted.