Retirement Income and Cash Flow

How do you plan to meet your retirement needs? You likely want to start with an estimate of how much money you will need after you retire and evaluate how much of that will need to be generated by your investment withdrawals. You also want to estimate your investment time horizon—how long you need your portfolio to work for you—which may be based on your own lifespan, that of your spouse or dependants, or even longer, depending on your goals.

For many retirees, pensions make up an important part of their planned retirement income. Some retirees will also rely on investment withdrawals to help cover costs or expenses to maintain their lifestyle after they retire. Before considering your retirement cash flow considerations, let’s take a closer look at some factors that affect your expenses in retirement.

How Will My Cash Flow Considerations Change With Retirement?

When estimating your expenses in retirement, consider how they could be affected by non-discretionary spending, discretionary spending, inflation and investment time horizon.

• Non-discretionary spending is spending that you don’t have a lot of control over—basic living expenses, utilities and housing costs, debt and taxes.
• Discretionary spending is spending on the extra, nonessential things you would like to do in retirement—travel, hobbies, luxuries and gifts or legacies for your children or grandchildren.
• Inflation can impact how much your money can afford over time. If inflation continues to rise at an average rate of about 4% per year (as it has in the UK since 1915^[i]), and you need £50,000 a year to pay for retirement today, then you will need £115,000 annually in 20 years just to match the same purchasing power!
• Time horizon is an important factor that can help determine your total retirement costs. You do not want to run out of money and find yourself unable to meet your needs later in life. Consider that it is possible that you live longer than you expect, and might need your portfolio to provide for a longer time period. Additionally, depending on your individual situation, your investment time horizon might include your spouse’s life expectancy, financial support for children or other dependants.

You may generate some of your retirement income from the State pension, personal or workplace pensions, business or real estate income, or even a salary if you plan to work after retirement. But you may need withdrawals from your investment portfolio or savings to fully cover your retirement expenses. Fortunately, you have many options for achieving this.

Understanding the Difference Between Investment Income and Withdrawals

Whilst planning for your retirement, you should evaluate the best way for you to pay for expenses. Income-generating investments, pension benefits, investment withdrawals, or some combination may have a place in your strategy. The distinction between income and withdrawals can be important.

Income is money received. In a retirement portfolio, this typically comes from specific income-generating investments, such as interest from fixed interest securities or dividends from equities.

Withdrawals, in contrast, are money taken from selling a portfolio’s investments. In a retirement portfolio, withdrawals often come from selling individual assets such as equities or fixed interest securities.

Managing Your Portfolio for Retirement Income

Some investors prefer to rely on income-generating investments, such as fixed interest securities or dividend-bearing equities.

This strategy can deliver predictable income, but it also comes with some risks:

• Your asset allocation may not generate enough income to cover your costs as a retiree. Be sure to evaluate whether your asset allocation is appropriate for your retirement needs.
• Dividend-bearing equities could reduce or even stop bearing dividends. Dividends from equities are not guaranteed or risk-free investments. They are just one way for companies to share profits with investors.
• Some interest-bearing investments may not be the most appropriate for your specific situation. If you focus on selecting income-generating investments solely for their income without properly evaluating how appropriate they are for your needs, you may not end up with the best portfolio for your situation.

Managing Your Portfolio for Withdrawals

In some cases, shifting your focus from income to withdrawals could be the more appropriate strategy to meet your needs. If you need portfolio growth, an equity strategy could help, since equities have historically generated higher average returns than fixed-interest securities.^[ii]

Investing in equities may also enable you to generate cash outflows by selling equities periodically, a strategy we call “homegrown dividends.” This could present you with a couple of advantages:

• It allows you to keep more money in equities, which have a higher probability of better longer-term returns—you don’t have to limit yourself to investing in only income-generating investments.
• It gives you greater flexibility to reallocate your portfolio as market conditions change—you can decide to pare back specific equity positions while maintaining exposure to others without worrying about how much income each position generates.

If you plan on taking regular distributions then you might consider keeping some cash in your portfolio to cover emergencies or short-term expenses. But remember, holding too much cash could mean foregoing the growth you can get from holding other assets.

Finally, consider that if you sell a security that has depreciated since purchase, you may be able to claim a loss to reduce your total taxable gains.*

Fisher Investments Can Help With Retirement Planning

Understanding your cash flow position and how to meet your retirement needs can be daunting. Fisher Investments can help you assess your retirement plan, create a personalised portfolio to meet your needs and manage your investment cash flow.

To learn more, call Fisher Investments UK today or download one of our educational guides.

* The contents of this document should not be construed as tax advice. Please contact your tax professional. 

^[i] Source: Global Financial Data, as of 13/02/2019. Based on UK Retail Price Index in GBP from 1915-2018.

^[ii] Source: FactSet, Global Financial Data, as of 13/02/2019.