Income in retirement: Why inflation matters

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This is a sponsored article from Pioneer Investments.

 

jack-lin

Jack Lin, Head of Asia Pacific, Middle East and Africa, Pioneer Investments.

Income investing has been in great demand among investors in recent years and we believe this trend is set to continue. Ageing population, deleveraging, regulation and the middle class squeeze are all trends that are further exacerbating the need for income.

Among the secular trends underpinning the increased demand for income, one of the most relevant is demographic challenges. The world is getting older and living longer. According to the United Nations, “a significant ageing of the population in the next several decades is projected for most regions of the world”. Globally, the number of elderly people (aged 65 or above) is forecast to increase from 610 million in 2015 to over 1.5 trillion in 2050, when elderly people will account for 16% of the world population, double the level of today. The decreasing fertility rate in developed countries in recent decades is also a relevant factor as it translates into a shrinking working population. As a result, for the first time in human history the number of elderly people above 65 years is about to exceed the number of children below five and life expectancy continues to rise.

This means that while the number of pensioners is rising, the number of working people to support their retirement is decreasing. In 2050, forecasts predict 3.5 working people per pensioner globally (deteriorating from the 2013 forecast by the United Nations of 4:1). In many countries, pensioners are already sourcing income from work and savings to supplement their pension.

A strong focus on risk is relevant when planning for retirement income. Inflation, for instance, represents an important risk to consider. In fact, should inflation be higher than expected (i.e 2.5% vs. 1% in the example below), savers risk running out of funds in retirement. In the example provided, in fact, a retiree with a US$1 million portfolio at age 65 with an annual withdrawal of US$35,000, investing in a portfolio that generates a fixed 2.5% annual income, risks running out of money at age 95, if a 2.5% annual inflation materialises.

In addition, retirees face the risk of being exposed to higher inflation on their spending. In fact, in the retirement phase, the share of expenditure for housing and health care increased.

So what can investors do?

In our view, traditional source of income (such as government bonds) may no longer be able to meet investor needs, as yields continue to be low. In the search for income, investors may consider enlarging their investment universe and exploring a wider range of potentially higher yielding investment opportunities across different asset classes – fixed income, equities, multi-asset or real asset. However, there are risks associated with potentially higher yielding assets. We think that an investment approach focused on broadening income sources while managing risks, such as inflation, may benefit investors in a low yield environment.

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PIONEER INVESTMENTS DISCLAIMER

Unless otherwise stated, all information contained in this document is from Pioneer Investments and is as of December 2016. The views expressed regarding market and economic trends are those of the author and not necessarily Pioneer Investments, and are subject to change at any time. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Pioneer Investment product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. These views are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any service. Pioneer Investments is a trading name of the Pioneer Global Asset Management S.p.A. group of companies.

This is a sponsored article from Pioneer Investments.

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