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Do you have a retirement strategy for income and growth?

4 steps that outline the basis of a post-retirement investment plan that takes the current climate into account.

4 steps that outline the basis of a post-retirement investment plan that takes the current climate into account.

Published Aug 22, 2023

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Any good investor knows that one of the most important factors to long-term financial stability and success is to have a trusted strategy, and if there is ever a time in your life where you need a strategy; it's during retirement.

Here are 4 steps that outline the basis of a post-retirement investment plan that takes the current climate into account.

Step 1: Determine where you are on your investment journey

Every investor's journey has 2 phases. The first is the accumulation phase, where the focus is on maximising capital growth in a tax-efficient way to build a retirement nest egg. The second is retirement, where investors enter the decumulation phase, and start drawing down on their capital.

Step 2: Identify your goals and objectives

Your goal is most likely to be able to draw a regular income while maintaining your standard of living over your lifetime. In that case, a living annuity is often the most appropriate option in retirement and provides attractive benefits such as flexibility and inheritability.

However, because a living annuity pays a regular income, investors in these products face new risks they may not have considered during the accumulation phase of their investment journey. So, your objectives should pivot for both income and growth.

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Step 3: Develop a plan that takes into account the potential risks

Mitigating the risk of Erosion Of Future Purchasing Power By Inflation

This risk may not be that noticeable in the short term, but the impact over time can be devastating. For example, at an inflation rate of 6% per year, the purchasing power of one rand's worth of savings today will reduce in value to only 17 cents over 30 years. This risk can be mitigated by ensuring that an investment portfolio has sufficient exposure to growth assets to ensure that the returns exceed inflation over time.

Planning for Outliving your Retirement Capital

Many investors underestimate the time they will spend in retirement, and with advances in medical technology, the odds of a longer-than-planned retirement are increasing. Ensuring sufficient exposure to growth assets within the retirement portfolio is an important part of the strategy to combat this risk.

Still, investors may also consider allocating a portion of their retirement capital to a guaranteed annuity where the longevity risk is essentially transferred to a life office by paying them a fee.

Deciding when to do that and with how much of their retirement capital requires a detailed discussion with a qualified financial planner. Investors can also manage longevity risk by ensuring that the income drawdown rate from their retirement portfolio is sustainable.

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Dealing with Sequence Of Return Risk

The final critical risk is what we call sequence of return risk, which manifests when an investor's retirement date coincides with an adverse market environment. A higher proportion of negative returns earned in the early years of retirement will have a lasting negative impact and reduce the amount of income an investor can withdraw over their lifetime. This risk is best illustrated by way of example.

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Step 4: Execute your plan

Now that you have a clear understanding of the importance of a retirement strategy that combines capital growth objectives with capital preservation, you need to ensure you have a trusted partner to support your execution of this strategy.

For those investors looking for solutions to the investment challenges presented in retirement, Coronation's flagship retirement portfolio, the Coronation Capital Plus Fund, has a long-term track record of addressing these objectives.

At Coronation we know the importance of making the right investment choice; we also know the value of seeking independent professional advice. If you are at all uncertain as to which is the right investment for you, we recommend that you talk to your financial adviser.

Coronation is an authorised financial services provider.

For more information, click here.