Retirement income planning firm Chancery Lane has called on the industry to redefine the meaning of risk in retirement investing.
In its latest white paper, Chancery Lane makes the case for an income investing strategy as opposed to a capital gains strategy linked to retirement planning.
The document warns that the “stubborn confusion” of income and capital returns is a “major stumbling block” to providing income to pay monthly living expenses.
He argues that the income stability of an asset matters more than its capital value or share price if the goal is to ensure retirees receive income each month through reliable investments.
Chancery Lane Managing Director Doug Brodie said: “Having had institutional risk descriptors as the backbone of defining ‘retail investor risk’ for so long, we shouldn’t miss an interactive discussion between the advisor and investor on income risk, capital risk, and emotional decisions and timelines.
“The simplicity of the natural income approach is more predictable, more valuable, and ultimately more reassuring for investors, especially those in retirement.
“It meets what is demanded by most pension investors – income for life, increasing each year to counter inflation, with a good degree of certainty, while retaining some or all of the capital at forward as needed.”
According to data from Chancery Lane, there was no correlation between income and capital over the past 33 months.
Among the major investment trusts tracked by Chancery Lane, the income payout record remained at 100%. Only one of them made a reduction, in 2020.
In contrast, the FTSE All Share Index has fallen 16 times since January 2020, or 48% of the time. Chancery Lane said passive index investing is a “stressful and unreliable” method of generating income.
For the bond market, Chancery Lane used the M&G Corporate Bond fund as a proxy. It also fell for 16 of the 33 months.
Brodie added, “Even during this period of high investment volatility, investment trust dividends have remained consistent and outperformed earnings thanks to the total return of low-cost passive trackers and the traditional 60/40 portfolio.
“This is because they have a rare ability to support dividend payments as balance sheet reserves, which is a good option to provide stable income for those who have bid a fond farewell to their former stable income – monthly salary.”
In last year’s white paperChancery Lane sought to spread the assets of a portfolio to generate income.
He has found that an equity investment is often the safest way to achieve this goal.