The phrase “new normal” seems to have entered our vocabulary over the last few weeks, and while our day to day lives may look very different for a while yet at some point in the not too distant future we will all begin to move back to a level of normality.
Due to a potential decrease in day to day spending the impact for those living on retirement income may yet to be fully seen and it is worthy of further thought.
Since the pension freedoms announcement of 2014, the retirement advice market has seen a move away from annuities with many clients wanting increased flexibility in their retirement options.
As a result, many of those retiring in the last five years are in the main heavily reliant on investment portfolios to fund their retirement.
Income requirements are obviously unique to every client but rule of thumb calculations have shown that an income of 4% per annum is potentially a sustainable expectation and with the investment markets of the last few years investors have in the main not struggled to reach and in many cases exceed this expectation.
Events, dear boy, events
Things may have changed though and the recent events across the globe have challenged investment portfolios not only in capital value but also in the generation of income and it is this impact which may be longer felt by those retirees.
As interest rates have remained low many investors have sought more healthy levels of returns from equity markets and it is this source that may be most eroded as some companies delay or cancel their dividend payments in a bid to bolster their own financials.
While reducing retirement income levels may not be that palatable, it is a real choice, but are there other potential options to consider whilst remaining within an investor’s tolerance for risk?
Equity markets are potentially offering incredible value for investors right now and in time will recover so abandoning them completely is perhaps not the best course of action but complementing them with other opportunities could be a way forward.
A multi-asset approach has seen some investors look wider than traditional equity sources with the inclusion of bonds, property, infrastructure, private equity and other alternatives as a means to broadening the scope for income generation.
Although not totally immune to the market effects, those who have broadened their sources of investment income are now potentially seeing the true benefits of income diversification.
Steve Hunter is head of business development at Seneca Investment Managers