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.
When estimating your expenses in retirement, consider how they could be affected by non-discretionary spending, discretionary spending, inflation and investment time horizon.
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.
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.
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:
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:
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.*
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.
* 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.Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.