Investments for growth or income

Flim

Hi all, we have been invested in the stock market for a few years and are now semi retired. We are still a few years away from State Pensions and are using a mixture of our cash savings and drawing down our investments to fund the gap.
Just wondering if there is much difference between a portfolio set up for “growth “, compared to one for “income”. We are with an IFA, but since we started drawing down I am not aware that our portfolio has changed?

Many thanks for any advice..

DireEmblem

It is probably best speaking with your IFA, but if you are nearing the end of your working journey, its probably more important to you to have steady income.  You probably have at least 70% in bond funds and 30% in income/growth.

Moe_The_Bartender

If they are still a few years away from state pensions, they will probably live another 25 years. With that kind of investment horizon, I would be 100% in equities.

Linton

I do not think it is a choice between a portfolio set up for growth or one set up for income.  Half your money wont be used for perhaps 15-20 years.  During that time your future cash needs will increase with inflation, but no one knows what the % increase will be.  The only way you can have any chance of coping with that is to invest for growth as equity is arguably the only investment that can be expected to rise at least as fast as inflation on average and over the long term.  So if you intend to drawdown throughout your retirement I would say you need at least half your money in equities

However the downside is that with growth comes volatility.  Drawing money down when prices are low runs the risk of eating into the capital you need for future growth,  so it's something you need to manage.  Here you have a range of options, for example:
1) Vary expenditure 
2) Cash and/or safe investment buffer so that in the bad times you can avoid depleting your core equity for a while.
3) Invest for income as interest and dividends are  less volatile than capital.
Whatever you do you need a predetermined stratregy.

Since we dont know how you were invested in earlier times nor whether you are drawing down at a rate that could risk your long term income it's impossible to give an opinion as to whether your current portfolio is appropriate now you are drawing down.  Also, it is not clear for how long you need to drawdown.  For example, if it's purely to cover for State Pension for perhaps 8 years or less until you reach SPA I would suggest that you keep all the money you need in cash or very safe investments.  The rest could be 100%  equities.  On the other hand if it is intended to form an essential part of your income for the rest of your lives or perhaps you see your pension pot as an inheritance for your family you may benefit from a more sophisticated approach.   Everything depends on your circumstances and requirements.

You should have this discussion with your IFA if you haven't already.

Apodemus

DireEmblem said:

It is probably best speaking with your IFA, but if you are nearing the end of your working journey, its probably more important to you to have steady income.  You probably have at least 70% in bond funds and 30% in income/growth.

I'm at a similar stage in life, but wouldn't want to be at 70% in bond funds!

AnotherJoe

Income is just money you take out of your pension,
Whether that originated from investment growth or investment income doesn't matter, the loaf of bread you buy in Tesco isn't aware of the difference. 

However your overall total income will be aware, because by selecting investments based on how much income they currently provide, you bias your investments into those that are slow growing or declining and pay out income either to bolster their share price or because they can't do anything better with it. 

The also inherent assumption that an income portfolio is safer because the shares will bimble along and you'll have nice steady income whilst retaining your capital , has not been true this century and the advent of Covid Has emphasised that. Many are Cash cow industries with little growth in danger of being obsoleted overnight and making the assumption of a steady 4% through life a joke. "steady income" can come equally by selling 5% of an investment that's grown 10% or taking the 4% income some "income based" investment produced and hoping that continues whilst it's capital value declined by 20%.  

So, forget this false dichotomy and invest to get the maximum increase in your overall wealth concomitant with the amount of risk you are comfortable with, and as pointed out by others bear in mind prominently  that the fact you retire at age 65 doesn't mean that all your investments immediately need to go into "retirement safe mode" because much of them will be invested another fifteen years and maybe forever, (before you buy an annuity) ....... and they aren't that safe either. 

Flim

Hi all and many thanks for your replies. I am about 3 years away from pensions which should provide more than enough income without the need for any further drawdown from investments, so  Probably looking at 8% drawdown per year until  then.
What return would you normally expect to get from equities?

Prism

Flim said:

Hi all and many thanks for your replies. I am about 3 years away from pensions which should provide more than enough income without the need for any further drawdown from investments, so  Probably looking at 8% drawdown per year until  then.
What return would you normally expect to get from equities?

For what its worth Vanguards current forecast for a global collection of equities over the next 10 years is around 6.5% per year, minus any fees on top.

With a good drawdown plan including equities, cash, maybe property and bonds you should be able to deal with almost anything the next 10 years throws at us.

Linton

Flim said:

Hi all and many thanks for your replies. I am about 3 years away from pensions which should provide more than enough income without the need for any further drawdown from investments, so  Probably looking at 8% drawdown per year until  then.
What return would you normally expect to get from equities?

If you only need the drawdown for the next 3 years I suggest you take it the money you need as cash now assuming you can get it all without excessive tax.  You would then be free to invest the rest at whatever risk/return level you are happy with.  3 years us too short a time to make any prediction as to return.

Thrugelmir

Prism said:

Flim said:

Hi all and many thanks for your replies. I am about 3 years away from pensions which should provide more than enough income without the need for any further drawdown from investments, so  Probably looking at 8% drawdown per year until  then.
What return would you normally expect to get from equities?

For what its worth Vanguards current forecast for a global collection of equities over the next 10 years is around 6.5% per year, minus any fees on top.

With a good drawdown plan including equities, cash, maybe property and bonds you should be able to deal with almost anything the next 10 years throws at us.

6.5% ?  That's at the top end of expectations.  UK equity at 4% - 6%.  Global excluding UK for sterling investors 3.5% - 5.5%. Fixed income is forecast at 0.5% -1.5% .

dunstonh

What return would you normally expect to get from equities?

Over a three year period you would be looking at anything minus 40% to plus 50% 

You cannot apply the long term average figure to a 3 year period.   As such, you should not be heavy in equities.  Indeed, you should be mostly cash.