AS the baby-boomers reach retirement, for the first time their generation is set to experience the down side of the post-war population explosion that they have benefited from for so long.
Having been contributors to state funds throughout their working lives they are now becoming beneficiaries and all of a sudden, things don’t look so rosy.
While of course it is good news we are all living longer – thanks to improvements in modern medicine and generally improved lifestyles – it also means that retirement income will be needed for a longer period.
As we all know, state pension benefits operate on a ‘pay-as-you-go’ basis funded by National Insurance / Social Security contributions being paid today.
As the working population declines in proportion to the retired population, the money will very quickly start to run out if we are not careful.
Already, the retirement age has been increased to help ease the situation but more will need to be done in due course.
And with state benefits already falling below a liveable wage for many, additional occupational or private pension funds are all the more important.
Sadly, in many cases these too may prove to be inadequate in the long run unless careful investment planning is built in to offset the effects of inflation over what could easily be a 30 or 40 year period.
You don’t need me to remind you that with such low interest rates and long term Bond & Gilt yields, generating sensible levels of income from invested capital is already a huge challenge.
We are seeing escalating protests in the public sector from people who are being asked to contribute more and wait longer for their pensions, but the demographic reality is the same for them as well.
If they don’t accept these changes, who do they think is going to meet the cost?
The taxpayer of course; but many of those people are in the private sector and are already having to save more and wait longer for their own pensions – should they really be made to wait even longer because they have to pay more for the public sector as well?
Ideally the cost burden should be shared fairly – whatever that may entail!
Meanwhile reverting to the need to generate sustainable income over the longer term, fund managers are now saying that retirees will have to invest more smartly to secure an income throughout their lifetime.
This in itself will need to allow for capital appreciation as well, if income is to increase in future.
It will also need a much wider approach to investment, with a global perspective rather than the traditional approach of investing in single asset classes such as equities, property or bonds.
While growing income can be achieved from high yield bonds or equities, this may well be at the expense of capital stability.
Conversely, the capital stability of bonds may well mean sacrificing income growth.
So what is the answer?
A blend of assets in a managed portfolio may well prove to be the better solution, with multi asset investments on a global basis most likely to be able to achieve the long term goals of both sustainable and growing income.
Richard Alexander Financial Planning Limited is an appointed representative of L J Financial Planning Limited which is authorised and regulated by the Financial Services Authority in the UK. Contact him at [email protected]
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