At the moment, we are facing the challenges of everyday living costs rising sharply (bills, travel, food, etc). In the UK, the average retirement length is roughly 20 years, assuming a moderately healthy person retires at age 66.
The figures around retirement are really dependent on what lifestyle you want to have. A single person in the UK would need around £43,100 per year to maintain a “comfortable” retirement, while a couple would need approximately £59,000 per year after tax, according to the Pensions and Lifetime Savings Association. Even assuming you are entitled to a full annual state pension of £11,502, the figures are significant over two decades.
Holding your assets in cash won’t cut it over the long term, either. Over time, cash savings are riskier than other forms of investment. This is because cash is less likely to keep pace with inflation, meaning your overall wealth could fall.
For the past 30 years, inflation around the world has averaged at well over 5% per year. In a nutshell, unless your savings deliver returns in excess of 5% or more, you are losing money.
This is why the £20,000 tax-free ISA allowance is still important, even in retirement – with the goal of building a diversified portfolio that invests across a number of assets to mitigate risks.
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Here are a few options to consider:
1. Multi-asset
Multi-asset funds simply take the choice away from you and give it to an asset manager to build a diversified portfolio of bonds, equities and other asset classes. A good starting point here is the Jupiter Merlin Income Portfolio, which is managed by one of the most respected multi-asset teams in the industry. It has been designed to provide an immediate and growing income, with the potential for capital growth too. The fund has returned 33.3% in the past five years and yields 3.3%.
2. Strategic bonds
There is an old adage that you should hold as many bonds as your age to ensure you strike the right balance between generating returns and lowering your risk profile as you get older. For example, a 55-year-old with one eye on retirement should have 55% of their portfolio in bond funds as they prepare to move from earning money to conserving it. While this adage is arguably flawed these days as people live longer, the fact remains that bonds are an indispensable tool in meeting the challenges of retirement.
Choosing the right bond fund is no simple task, particularly in this uncertain economic environment. One way for investors to swerve the difficulties of choosing between a gilt, corporate or high-yield bond fund – and the individual challenges each sector of the bond market faces – is to use a strategic bond fund. These funds give managers the flexibility to diversify their bond holdings across a range of sectors, allowing them to shift allocations as they see fit.
A good example would be the M&G Optimal Income Fund. Few fixed interest managers can demonstrate that they can add value through interest rate exposure management, asset allocation and stock selection. Richard Woolnough is one of those few – the fund can, and often does, invest in some equities, and also derivatives.
Over the past five years, the fund has returned 20.9%, while also yielding 3.8%.
3. Monthly income
A monthly income can help investors pay for certain bills or repeatable events. The latest figures from the Office for National Statistics (ONS) put the average weekly household expenditure at £567.70, which works out to a monthly expenditure of £2,270.
A good monthly income fund will offer regular payments (to help pay for some of these costs) as well as growing your investment pot. One to consider here is the WS Canlife Diversified Monthly Income Fund, a diversified portfolio of income-generating assets, including global company shares, international Government and corporate bonds, as well as property. This fund aims for a yield of at least 4% and has returned 42.5% to investors in the past five years.
4. Defensive income
A global income alternative to consider is the Fidelity Global Dividend Fund. Manager Dan Roberts looks for companies with understandable business models and predictable, resilient returns, and is happy to pay a fair price for a good company. The criteria for selecting companies falls mainly into two buckets. The first is valuation support, with Dan wanting to make sure he does not overpay for stocks – regardless of how good they look – as he does not want to dilute returns. The second is the quality of the franchise, with an emphasis on investing in resilient businesses that can be depended upon.
The fund has returned 84.1% in the past five years, while also offering a dividend yield of 2.3%.
5. Cautious global
Those who may want to take on a bit more risk might consider a concentrated portfolio of leading global companies. The investment team behind Morgan Stanley Global Brands has a mantra: ‘Don’t lose money’, which will possibly be as comforting to investors as the familiar names that can be found in the portfolio. The team, which operates as a boutique within Morgan Stanley, looks for high-quality companies with defendable and visible future earnings, allowing them to give attractive returns to shareholders and reinvest in their business to stay ahead. Popular names in the portfolio include Microsoft, Visa and L’Oréal. The fund has returned 70.3% in the past five years.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius’ views are his own and do not constitute financial advice.
