Capital Ideas

Investment insights from Capital Group

Retirement Planning
Rethinking drawdown income: Ideas for financial advisers in post COVID-19 planning with retirees
Philip May
Director of Retirement Income Solutions
  • Offer clients a “retirement finances review”
  • Encourage clients to remain focussed on their long-term objectives
  • Educate clients to think more broadly about suitable assets for retirement investment and recognize the importance of diversification


Maintaining a long-term perspective

The familiar advice of sticking to a long-term approach has rarely been more relevant than at the current time. The combination of volatile and illiquid markets against the background of a shocking loss of life and huge disruptions to peoples’ lives is probably not the right environment for making sudden changes in investment strategy. We think the right approach is for investors to work with their advisers to refine their investment objectives and evaluate how they relate to the new circumstances of a post COVID-19 world.


Diversification is key

Diversification remains an important investment principle. Many UK investors will have been impacted by reductions in dividends in popular higher yield sectors such as energy companies and banks, which accounted for 22% and 16% respectively of UK FTSE 100 dividends before the crisis.1  Investors with a narrow geographic focus on the UK are likely to have been particularly badly affected. There has been much media discussion in recent weeks about an end to globalisation. From an investors’ perspective however, more globalisation in terms of source of income is likely to offer better resilience. Although it may well imply lower dividend yields in the shorter term, a strategy that is diversified by sector and country is likely to prove less vulnerable to shocks than one that is concentrated. With the UK now accounting for only 5% of the global equity market2, global diversification should be on every adviser’s agenda for discussion with clients.  Although introduction of overseas holdings brings with it currency risk, it should be recalled that many multinationals have been paying UK dividends in non-sterling currencies for some years. As at 31 December 2019, UK FTSE 100 companies paid an estimated 48% of dividends in US dollars or euros.3  


Consider a broader range of asset classes

Advisers should consider educating investors about potential investment options, including asset classes they might not have considered previously. For example, in a world where equity dividends are vulnerable, and yields on cash are non-existent, fixed income investments have potential attractions in providing retirement income. For most retirees, the aim should still be to grow income over time, but in the current exceptional circumstances, the contractual income that bonds provide could be less risky than discretionary income from equities. Although yields on investment-grade global government and corporate bonds are modest at 2-3% currently,4  the payment of interest and capital on such bonds is relatively secure and they could form the core of diversification into fixed income assets. For retirees who require higher income and are prepared to accept risks which are more correlated with equities, an element of high yield largely non-investment grade debt issued by corporate borrowers or emerging markets governments and yielding around 6-7%4, could be added. Whilst such options carry an element of risk, including possibly currency or credit risk, these can be significantly mitigated by careful selection and diversification.


Take a holistic view of income sources

Any review of income generation options should encompass a wider context, including diversification between secure (but fixed) income sources such as annuities and less secure (but potentially growing) sources of income such as balanced investment portfolios. Investors drawing a retirement income who are still receiving some income through employment could consider increasing the time they work. While this will not be possible or desirable for all, it could have a material impact on their finances and mitigate issues such as sequencing risk. Investors not retired but considering early retirement, say at age 55 or 60, should recognise the financial impact of this reduction in “human capital”- i.e. the value of their future earnings, on their overall finances.


Help manage clients’ expectations with a flexible approach 

Investors may have to face up to material reductions in the amount they can safely draw from their portfolios, and perhaps consider alternative ways of taking income. The desire to draw a regular fixed “salary” from an investment portfolio is a strong instinct but could lead to portfolio depletion in adverse circumstances. A more flexible approach could be to think in terms of different categories of spending. Having an emergency account with sufficient cash to cover up to a year’s essential spending without taking withdrawals from the underlying portfolio would be prudent. For regular expenditure, it could make sense to divide spending up into areas where a fixed regular return is highly desirable (living expenses) and areas where a degree of variability would be acceptable (lifestyle expenses), and match appropriate investments against each category of expenses. Fixed Income investments would typically be a good match for living expenses, whereas balanced portfolios including both bonds and equities would better match lifestyle expenses. Furthermore, withdrawals do not always need to be taken as natural income. Supplementing natural income through the harvesting of capital gains where available may well make sense in the current environment of lower yields. 


Offer clients a timely review

Advisers should consider offering clients aged 50 and over a specific “retirement finances review”. Topics to cover could include assessment of the impact to date, e.g. from reductions in dividend income, capacity to absorb future reductions in income, tolerance for risk and how the crisis has affected their wider finances. The output from this review can then be used to develop long term plans to help the investor adapt to the new investment realities of a post COVID-19 environment.


1. Data as at 31 December 2019. Sources: FactSet, Capital Group

2. As at 30 April 2020. Source: MSCI

3. Sources: FactSet, Capital Group

4. Source: Capital Group

Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Philip May is a director of Retirement Income Solutions at Capital Group. He has 42 years of investment industry experience and has been with Capital Group for 16 years. He holds a master’s degree in modern history from Oxford University and is a Fellow of the Chartered Securities Institute. Philip is based in London.

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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.