2016 The Income and Growth Challenge - May 2016
The Income and Growth Challenge - May 2016
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.
Given the ongoing market preference for market-linked income withdrawal plans (most often called living annuities), this issue again focuses on the key risks investors face when selecting this option. We also propose strategies with which to manage the trade-offs that need to be considered in ensuring appropriately prudent retirement income planning.
Prudent retirement income planning starts with setting an appropriate strategic asset allocation and forming reasonable long-term return expectations. We continue to hold the view that living annuity investors need to moderate their expectations about the level of income that can be sustained over a full retirement, recommending an initial drawdown rate of below 5% as a starting point in the planning process. While weaker recent market returns resulted in our current return expectations for the next ten years being broadly in line with the actual experience over the last decade, we continue to advocate a hard limit on exposure to growth assets of around 60% for most retirees.