Vantage Point: Investing for income  

Building the optimal retirement income portfolio

  • To discover how the landscape for retirement has changed
  • To understand how changes to the tax system impact retirement options
  • To discover how the changing regulatory environment impacts retirement options
Building the optimal retirement income portfolio
  Retirement can now last multiple decades

People are living longer, and with the value of money reducing every day at a rapid rate, building that optimal retirement income portfolio has become even more important.

But what does such a portfolio look like?

The first issue is the need to strike a balance between the percentage of capital withdrawn in addition to the natural income produced by the portfolio needs to be kept to a sustainable level. 

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As Oliver Robson, investment director at Evelyn Partners, explains, cashflow forecasting as part of the financial planning should stress test scenarios where the client lives to an older age than previous assumptions to ensure the risk profile and investment objectives are optimal. 

Robson says: “We do also see income requirements vary depending on the stage of retirement and it is prudent to factor in later life spending for medical and care costs.”

But Robson warns investors and their advisers need to remain cognisant of the risks of becoming over-reliant on investment portfolios to make up any day-to-day living shortfalls.

“Especially where this is out of kilter with the original financial plan,” he adds. “The increase in living costs and decrease in disposable income felt by many demographics has led to an increased reliance on investors’ portfolios as a source of income.”

Needs must 

Yet a big issue is that customers have little sense of how much they need, or how long that money might last, according to Tim Grey, managing director of Sandringham Financial Planners.

So, trying to convince clients to face mortality and plan for a 30-year retirement is the first challenge.

“Then we can get into how much might be needed and when,” Grey adds. “From there it’s possible to build investments that at least reference a timeline. Cash-flow reserve strategies, or ‘bucketing’ is helpful here. 

“To some degree, we would have to admit that most clients of advisers are fortunate enough to have choices and disposable income – in other words their fixed costs of fuel, energy and food are proportionally a lower amount of their overall income. 

“It’s likely that the clients’ discretionary choices change, as opposed to having to raise income levels to meet bills. It has become a more important question for modelling the medium and long term as far as inflation is concerned. It’s also worth pointing out that the triple-lock on the state pension provides a degree of protection against inflation, albeit on a proportion of a retiree’s income."

With the biggest risk to people living longer being that they run out of money, Catriona McInally, business development manager at M&G Wealth, concurs with Robson that cashflow modelling is critical to providing an assessment of income sustainability and potential life expectancy.

McInally adds: “The portfolio should be built around the individual’s attitude to risk, but also their capacity for loss; what level of fall in value they could take and still receive the necessary income both now and in the future.