Creating a sustainable income in retirement is one of the most important pieces of financial planning people will do in their lifetimes.
Ensuring that they have enough to achieve ambitions, goals and security is paramount, and of course, there is no one set way to achieve this.
Using a multi-asset approach is a well-trodden path, but ensuring that market shifts and trends are accounted for is becoming a vital element of retirement portfolio planning.
One such area that is of increasing concern is the decline in yields from traditional income-bearing assets, namely in government bonds, prompting some to expand diversification frameworks beyond conventional approaches.
“Ultra-low yields leave investors in retirement with two choices,” explains Francois de Bruin, manager of the Aviva Investors Sustainable Income and Growth fund.
“One: accept lower returns and in most cases adjust lifestyle expectations, or two: take a fundamentally different approach to the asset allocation framework.”
Bruin explains that such a mindset is “derived from the capital asset pricing models” of risk and reward that many retirees have adhered to since the 1960s, yet a combination of current market factors, as well as societal shifts, is making such a framework hard to observe.
“With life expectancy and longevity on the rise, the problem posed by the trade-off between these two choices are as acute and important as ever,” he adds.
“The second choice involves a deeper understanding of the risks investors face on their retirement journey, as well as a willingness and ability to invest across a broader spectrum of asset classes.
“Furthermore, investors need to be highly selective, as aggregate markets today fail to offer the yields and returns they need to retire sustainably.”
The alternatives route
This is a sentiment echoed by Matthew Yeates, head of alternatives and quantitative strategy at 7IM. He says that it is becoming increasingly essential that multi-asset portfolios identify varying sources of return, and notably, ones that can maintain pace with inflation.
For Yeates, this means “larger allocations to areas such as alternatives, real estate and credit, including emerging market debt, instead of simply holding government bonds”.
However, increasing allocations to alternative assets is not a straightforward endeavour, as they are “inherently complex and expensive”, according to Jason Barefoot, chartered financial planner at Ascot Lloyd.
“Expense compounded over many decades is one of the biggest detriments to a long-term successful retirement strategy,” says Barefoot.
Low yields from government bonds leaves asset allocation space that needs to be filled to achieve the desired growth outcomes – but that does not necessarily mean that bonds and gilts are out of the picture entirely.
“Government bonds still have a place but likely to a lower extent than would have historically been so,” explains Yeates.