The main focus of the financial news in the last few months has been the obvious falls and then subsequent expected recoveries in markets.
Capital values are certainly a part of the story. However, the more important aspect for those focused on retirement is income, and it is this element which may take longer to recover.
Equity markets have been a potential source of yield for investors in a low-interest rate environment, and regrettably, it is this source that may be the most eroded. Some companies have had to delay or cancel their dividend payments in recent market conditions.
You need only look at recent reports that have pointed to dividends being cut across quoted companies worldwide, alongside continued market uncertainty, to see a short-term narrative that could easily spook an anxious saver or investor.
The longer-term outcome of equity markets is almost always positive, but the legacy of this pandemic may well mean that most people will have to learn to deal with retiring on less or work for longer.
Reducing one’s income levels on a longer-term basis may not be the fairytale outcome we would most like in retirement, but it has become a major consideration for those both in and approaching retirement.
To paint the picture, during a regular Zoom catch-up with a friend of mine who is an adviser, we got on to the subject of retired clients’ income. She had taken proactive steps to manage their expectations, with some clients reducing and in some cases indefinitely pausing withdrawals from their pensions and investments over the last few months (appreciating not all clients are in a position to do this) due to lockdown restrictions limiting their need to spend, so were comfortable making this choice.
What was causing my adviser friend the most anxiety was that she was now hearing back from clients asking to switch the income tap back on – despite the challenges ahead.
Later life income remains crucial
As I write this, the equity markets are potentially offering incredible value for investors and although having partly recovered have the potential to go on further to new highs. Therefore, abandoning them completely is perhaps not the best course of action.
Complementing them with other opportunities, however, could be a way forward in terms of boosting income, and there are potential options to consider aligned to an investor’s tolerance for risk.
Could a wider approach including alternatives help?
A multi-asset approach has seen some investors look beyond traditional equity sources with the inclusion of bonds, property, infrastructure, private equity and other alternatives as the means to broadening the scope for income generation.
An important aspect here is having the experience and expertise to invest in this wider range. There is no shortage of opportunities, but a high degree of research and know-how is key in effective diversification.
Third-party managers with this specialisation can be the difference between adding intrinsic value, mitigating risk and diversifying sources of income in an existing portfolio, or otherwise incurring costly complexity.
Spreading the income load
Certainly, no one fund should be relied on to deliver income, and many advisers practise combining strategies to deliver desired income from not just a wide range of sources, but also a wide range of investment styles and approaches.
Although this approach is not totally immune to the effects of the market, those who have broadened their sources of investment income may now be seeing the true benefits of income diversification.
Steve Hunter is head of business development at Seneca Investment Managers