2017 The Income And Growth Challenge - September 2017
Appendix: Using Growth Assets In The Fight Against Inflation - September 2017
To illustrate the importance of an appropriate balance between income and growth assets in a post-retirement income portfolio, consider the following graphs. The charts track living annuity investments in two Coronation funds: the very conservative Coronation Strategic Income and Coronation Capital Plus, which is a moderate risk income and growth portfolio.
The ‘real capital’ section of the graph shows the real purchasing power of the investor’s money – i.e. the impact of inflation on their savings. The ‘nominal capital’ displays the investment amount before inflation is subtracted. The dark blue line shows monthly income over time, assuming a 6% starting drawdown rate increasing at 6% per year. The analysis is for the period July 2001 (when both funds were launched) to 31 July 2017. Over this period, the average money market fund returned 7.95% p.a. (after fees), while Strategic Income delivered 10.5% (after fees) per year and Capital Plus returned 12.8% (after fees) per year.
The first point to note is how quickly inflation erodes purchasing power. While your nominal investment may seem relatively buoyant, the actual buying power of your money starts to decline alarmingly fast.
Secondly, and crucially, the two charts clearly show how exposure to equities can support long-term investment growth. Strategic Income can invest only a maximum of 25% in growth assets, while Capital Plus can have up to 70% in these investments.
At a starting annual income level of 6% (increasing at 6% per year), investors would currently draw 8% of their capital in Strategic Income. The increase in the percentage drawdown rate over time would be due to the decrease in real capital over that period. In contrast, investors in Capital Plus would currently only be drawing 4.6% of their capital every year. This is because they have seen an increase in real capital over time.
Finally, the charts show how sensitive the capital value is to the starting income drawdown rate. Withdrawing a high rate of income at the start of retirement can have a large impact on the life of an investment. For more on selecting the initial income drawdown rate, refer to page 13 of this guide.
>> FIGURE 10: LIVING ANNUITY EXPERIENCE IN STRATEGIC INCOME
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