What do you need most from your investments in retirement? For many, it will be a secure income, but the reality may be a little more nuanced. Yes, income needs to be reliable and consistent, but it also needs to grow over time, and to defend against inflation. Investment trusts can play a role in supporting your income needs in retirement.
Retirement can be surprisingly long. With life expectancies increasing, retirement could be as long as 25 to 30 years. A man aged 50 today will live, on average, to 84, and has a 10% chance of celebrating his 97th birthday. Female life expectancy is even longer, with an average of 87, and a 10% chance of making it to 99.
That means it is crucial to consider the impact of inflation. While a low interest cash account can feel intuitively ‘safe’, it can erode the purchasing power of your retirement savings over time – i.e. how much it will buy in the shops, or on day-to-day services. To illustrate the impact of inflation, if you had £10,000 in 1996, it would have needed to grow to over £27,000 today to have the same purchasing power today[1]. You need to run to stand still. That means retirees have to harness investment growth as effectively as possible.
Consistency of income may also be important. While you may have an annuity (where you use a lump sum to convert savings into a long-term income) or the state pension to cover your day to day expenses, you may be relying on your investments to provide an income for ‘luxuries’ such as holidays. If this is the case, your income will need to be regular and reliable.
To help with that consistency, it is important that your retirement portfolio is not focused on a single area. If you have income from a single source, or only a handful of companies, you leave your portfolio vulnerable to a specific event. Markets can be unpredictable and volatile, and diversifying across a range of sectors and regions may smooth out some of these peaks and troughs.
Many investment trusts have a specific mandate to grow their income over time. A key difference versus many other fund structures is that investment trusts have an independent board, which oversees the trust and monitors whether the investment manager is delivering against that mandate. If necessary, the board can appoint a new manager. The result is that many investment trusts have built a long and consistent track record of paying a growing income to investors.
There are also unique aspects about the structure of investment trusts that make them a useful option for generating retirement income. Specifically, investment trusts can reserve income in good times, keeping it aside to pay out in more difficult conditions. Investment trusts can then dip into those reserves if the income on the underlying investments decreases in a single year, perhaps because of a weaker economic climate. This can help maintain consistency in the income stream.
Investment trusts pool investors’ capital to help build a more diversified portfolio. This can help manage risk for investors in retirement by ensuring that income is not dependent on a handful of companies or sectors. Invesco Investment Trusts can bring in new and diversifying sources of income into a retirement portfolio.
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