As people transition from the accumulation phase of investment into retirement, their investment objectives often change.
During the accumulation phase, the primary objective of most individuals is to maximise wealth for retirement within the bounds of their risk capacity. Within the drawdown phase (or retirement), a primary objective for most retirees will be to generate a level of income that is commensurate with their lifestyle goals. Other objectives often include helping out children with major expenses, perhaps paying school fees for grandchildren and may even include leaving a bequest for the next generation.
At the same time, upon nearing and entering the retirement phase, risks such as longevity, inflation and market risk become more important and more pronounced.
Lonsec Retire, a new service offered by Lonsec that provides information and tools specifically in the area of retirement, recently published an article that focuses on methods that can be used to meet the income objective in retirement.
It explores asset classes and investment structures commonly used to generate retirement income, outside of the age pension.
The aim of the paper is to assist financial planners and their clients in understanding the key advantages and risks associated with each type of income based investment, as well as the key characteristics that define each investment type. The asset classes and investment structures considered in this paper include:
- Term deposits
- Annuities
- Endowment bonds
- Bond funds
- Equities – income focused
- Hybrids
While the focus of the article is on asset classes commonly used to generate income, it is by no means an exhaustive list of all income generating assets and product structures.
In our view, income can come from a variety of sources ranging from growth assets, such as equities and property, to traditional income assets such as cash. It is important, however, to understand the pros and cons of each investment type.
In particular, the risks associated with various types of investments are important to consider, as certain features such as income certainty, or higher level of levels of income, will typically require some kind of trade-off. Retirees with different goals and requirements will require different levels of each in their portfolio. This type of portfolio tailoring is especially important in retirement, when accumulated funds must last a lifetime.
