Here is a quick introduction to our in-depth guide, Drip feeding from growth to income, shows in detail how clients can use income funds as part of their retirement can, which allow them more durable and predictable income in retirement.
We looked at what would happen if, instead of timing the change to decumulation, investors opted for the ‘pound cost averaging’ style of switching from accumulation to decumulation. Instead of a one-off switch, the investor’s pot slowly shifts over time from pure accumulation to decumulation.
In its simplest form, the strategy is straightforward: start with a pure growth strategy and, as the investor gets closer to retirement, ‘drip feed’ a percentage of their holdings from growth into income, specifically an income fund with the aim of providing steady income on a regular basis.
This strategy gives an increased chance of money lasting in decumulation for those who sold out and moved to a lower-risk fund at retirement. The income fund provides a level of income from monthly dividend payments, which covers what would have been taken from a drawdown portfolio without having to sell off units, reducing decumulation risks. It also gives a future projection of income based on units held which could be discussed with the client annually to determine if it meet their future income expectations
We compare two options at retirement: either switching back into a lower-risk drawdown portfolio (selling off units to provide an income) or providing enough units in the income fund to sustain the client for their needs without having to sell down.
Option 1: Invest into a growth fund and at retirement move into a lower-risk fund and cancel off units to supply an income. This approach is susceptible to various decumulation risks.
Option 2: Invest into a growth fund and, when he is 20 years from retirement, allocate 5% of his pot into a 4% yielding income fund, increasing by 5% each year. The dividends paid in this scenario mean that the portfolio is less affected by market movements during accumulation and offers more predictability at decumulation.
Read the guide for:
- Modelled case studies for both options
- A more detailed look at the natural income investment strategy
- Discussion of the main risks during the decumulation phase
- An overview of our WS Canlife Diversified Monthly Income Fund, a natural income fund which aims to provide a monthly income from securities that generate dividends, coupon payments and rental income, together with potential for long-term capital growth.
Investment strategy: Natural income
These funds are designed to generate a steady stream of income directly from their underlying assets, such as interest from bonds, dividends from equities, rental income from real estate, and sometimes income from alternative assets. They distribute that income on a regular (monthly) basis without the need to sell assets to generate cash. Because the income is ‘natural’ (i.e. produced by the portfolio itself) investors should often receive a predictable cash flow during retirement.
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
This document is issued for information only by Canada Life Asset Management. This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available in the Literature section for each fund at https://www.canadalifeassetmanagement.co.uk/