Whether you're nearing retirement or in retirement already, you may be thinking about your lifestyle choices right now as the cost of living continues to rise.
The truth is that you need to be prepared to ask yourself challenging questions about your post-retirement income and portfolio growth to help your retirement nest egg last and withstand inflation.
For Living Annuity investors the good news is that there are practical strategies you can apply to mitigate the risks and continue to thrive post-retirement.
Question 1: Have you considered how you manage your life's decumulation phase and the optimal income drawdown rate you need to provide long-term financial stability?
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.
Once you retire, your investment objectives should pivot, and while capital growth remains essential, preserving capital to ensure a sustainable income throughout retirement now becomes just as important.
One of the ways investors can manage the preservation of their capital is to ensure that the income drawdown rate from their retirement portfolio is sustainable. Watch the video below, which illustrates how sensitive the sustainability of the chosen income drawdown rate is to investment returns and supports Coronation's view that for most investors, an initial retirement income drawdown rate of 5% per annum is prudent.
Question 2: Have you planned accordingly for living longer than anticipated?
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 your retirement portfolio is an essential 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 your retirement capital, requires a detailed discussion with a qualified financial planner.
Question 3: What are you doing to combat inflation's impact and secure your standard of living?
The risk is the 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, so it's an important consideration early on in your retirement journey. The best way to mitigate this risk is to ensure that your investment portfolio has sufficient exposure to growth assets to ensure that the returns exceed inflation over time.
Question 4: Have you considered how you will manage Sequence of Return Risk, which comes into play should your retirement date coincide with an adverse market environment?
Mitigating Sequence of Return Risk is critical because a higher proportion of negative returns earned in the early years of retirement have a lasting negative impact and reduce the amount of income you can withdraw over your lifetime. Although this risk cannot be eliminated, the best way to deal with it is to ensure that your capital is protected during adverse market return periods.
This risk is best illustrated by way of example:
We cannot emphasise enough the importance of a retirement strategy that combines capital growth with capital preservation. For those investors looking for solutions to the investment challenges presented in retirement, Coronation's flagship post-retirement portfolio, the Coronation Capital Plus Fund, has a long-term track record of delivering on investor needs.
Watch the full video now to find out more.
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.