09 Sep 2018

Where Will I Get My Income In Retirement? (Part 1)

  • Uncategorized

After a summer of good weather and holidays for many, our minds may have wandered towards retirement and how nice it will be (eventually) to enjoy extended free time with the ability to do what we want, when we want. The unfortunate part of all this is that to do so requires money! Few will dispute that money gives you choices – to be able to choose how our retirement goes will depend on having enough to get by in comfort regardless of what our comfort expectation may be.

Many of us are entitled to the state pension, currently applicable at age 66 at a rate of €243.50 per week and if you have a dependant spouse over 66 you will receive €461.30 per week.  Not too shoddy it has to be said, a very generous entitlement it is too. However with our aging population it has to be questioned if it can be kept up in the long term.

A study authorised by Trinity College in 2012 demonstrates that between 2006 and 2021 the number of those aged 80 and older will increase by 53% while the number of over 85’s will more than double from 48,000 to 106,000. With demographics like that it is hard to see how our relatively generous state pension payment will be sustainable.

Thankfully though most Doctors and Dentists we meet are making or have made provision for their own retirement and have sufficient savings to provide themselves with a good lifestyle in retirement.

The difficulty is, with interest rates and bond yields paying 1% pa or less, all of the traditional ways of getting an income from your savings are no longer available to you. It’s very hard for a pensioner to believe that with €1m in savings, the income they will receive on deposit for that amount is €10,000 per annum…….just doesn’t make sense!

So, what are the other options? The four traditional asset classes for investing are Equities (shares), Property, Government Bonds and Cash Deposits. As we said above we can rule out cash and bonds for income, a 1%pa return just won’t work.

Equities

There are two methods you can use with equities to provide yourself with an income in retirement. The first is to invest in equities for growth and take a slice off the top of them each year to satisfy your income needs. You can do this through a fund or by buying shares directly, that’s up to you.

The thing you have to remember is that shares don’t grow at a steady rate so if you want 5% of your €1m per annum some years you will have growth left over and other years you’ll be digging into your capital. Your main concern should be a significant market correction of 20 – 30% which would mean your fund is down 25- 35% after you take your income. However, history tells us that stock markets bounce back so patience will be the order of the day, whether it takes months or years to rebound.

The second method is to invest in equities that provide you with a dividend income each year that will satisfy your need so that you don’t have to necessarily cash in any of your capital or at least if you do cash in some, it isn’t all coming from your source investment. You can do this either by investing directly or using funds depending on your preference.

Below I have outlined some funds that provide a variable distribution using the dividend income received within them:

Euro Div Aristocrats ETF               3.14%
BMO Enhanced Euro inc                5.55%
ishares asia pacific                           5.06%
ishares global dividend                   3.53%
FTSE 100 Dist ETF                          3.84%

The capital value of these funds will fluctuate, the difference being that you aren’t taking value of the capital to answer your income needs, the distribution is coming from dividends being received into the fund. In the event of a significant market correction the capital values of the fund will fall significantly but the hope is the dividend income will remain even though they are not guaranteed either.

Distribution funds come with a variety of features and structures. Some funds specify a monthly payout, while others offer a variable payment based on portfolio performance.

For example the Euro Dividend Aristocrats ETF index is designed to measure the performance of the 40 constituents of the S&P Europe 350 index that have increased dividends for at least the last ten years, and have a market capitalization of at least $3bn.

In the next edition I will look into how you can use the remaining asset class, property as an income generator to satisfy your income in retirement needs.