2016 THE INCOME AND GROWTH CHALLENGE
Issue 22Subscribe to Newsletter
Investors who are near or already in retirement face the most challenging of investor needs: simultaneously investing for both immediate income and long-term growth. The key challenge is to ensure a sustainable standard of living by balancing the needs of today with those of the future.
Retirement savers currently have two options when it comes to purchasing a compulsory post-retirement income: traditional guaranteed annuities or living annuities.
In previous issues, we have argued the need for a more conservative asset allocation for investors who are close to retirement.
Over the very long term, South African equities have delivered better returns than any other market in the world (in local currency terms). As is clear from Figure 5, growth assets (local equities, foreign equities and local listed property) have delivered annualised real returns (i.e. in excess of inflation) of around 6% - 7.5%, while income assets (bonds and cash) produced around 1% – 2% real per annum. In the last 10 years, most asset classes (with the exception of local property) delivered real returns that were more in line with their long-term averages than is often the case. This will not be repeated in all planning periods.
We have shown that a typical retiree who draws an income from a living annuity needs to plan for 25 – 30 years, can expect a relatively high inflation rate and, for at least the next 10 years, should expect more muted returns than those of the past decade.
Coronation offers two funds that meet the needs of income and growth investors – Balanced Defensive and Capital Plus. The funds’ risk budgets are designed to provide optimal outcomes by balancing the quest for attractive levels of real return over the long term with minimising the risk of capital loss over the short term.
Part of the solution to make the required trade-off between an adequate current and future income is to optimise asset allocation as far as possible. An appropriate balance between investing for growth in the long term and capital protection in the short term must be achieved.