Friday, 22 April 2016

Generating Retirement Income

A simple, effective way to generate the income needed in retirement

One of the biggest challenges most people face in retirement is generating the regular income they need and maintaining it for the rest of their lives.

You may have substantial assets, but they're not limitless, so you must be careful how you manage them. To meet the dual goals of generating needed income and sustaining it this is what you do.
First, determine the amount of annual income you need currently—say, €50,000—and then determine the best place(s) to get it. It won't all come from your retirement account because you likely have other income sources: State benefits, perhaps a pension, an inheritance, earnings from a part-time job and funds from other savings or investments.

All of those could reduce dramatically the amount you need to generate annually—perhaps to as little as €25,000 or €30,000.

To determine the rate of return you need to earn on your investments in retirement, factor together all of these realities and your personal preferences: Do you want to leave something for your heirs, preserve capital or spend it down? Then it's time to design a portfolio to meet that target.

Once you have the right portfolio, what is the best way to invest it? Well, if diversification is important to use throughout your working career, as I have long espoused, then it's doubly important once you're in retirement.

A diversified portfolio, of course, contains some assets that don't generate income or dividends, along with others that produce those unpredictably, making it difficult to carry on your lifestyle.
That's solved by a systematic withdrawal plan. It's simple and effective and it works like this: You decline to pocket the interest and dividends from your investments, instead reinvesting them back into the portfolio. To compensate for giving up that income, you arrange to receive a similar monthly amount from your account.

There's a big difference between that and drawing the income that a portfolio produces, as many retirees opt to do. Here's an illustration: Say you had invested €100,000 in a one-year fixed interest bank deposit and received the annual interest each year from 2005 through 2015. The interest would have fluctuated wildly—from €700 to €4,210—and produced €19,520 in income over the 10 years. The original €100,000 remained unchanged.

However, if you instead created a diversified portfolio the account's value would have grown to €198,126. You could then start producing twice as much income and easily offset inflation.
You could have systematically withdrawn twice as much in annual income as the bank deposit, and your account value would still have been 74 percent higher than the banks value. Even if you took triple the income of the bank deposit, your account would still have ended nearly 40 percent higher than the bank deposit.

Simply matching, doubling or tripling the banks income, however, would have left you with inconsistent monthly and yearly amounts. To solve that problem, you could have arranged for a consistent monthly withdrawal, just as you get from Social Security or a pension.

If you took a 5 percent income stream from the starting capital you would have received €50,000 income and your ending value would still have been €158,680—or 58% more than what you started with.

Of course, my illustration is hypothetical over a specific time period. Different periods and asset mixes would produce different results and, as always, past performance does not guarantee future results but you get the idea. I recommend this as the best approach for generating the regular income you want/need to live on in retirement and sustaining it for your lifetime.

Wednesday, 6 April 2016

Three stocks to watch for in the event of a Brexit

Which companies could be set to either benefit from a Brexit or will defend against volatility caused by a ‘leave’ majority decision? The prospect of a Brexit has dominated headlines recently, with almost a month still to go before the official campaign period begins on 15 June. Understandably, this has left investors feeling confused as to where to put their money, given that nobody is able to predict how markets will behave whether the UK leaves or stays in the EU. It’s a commonly held view that a ‘leave’ vote could severely bruise the home market as we are more dependent on the EU as a trading partner than they are on us. However, there are still plenty of individual stocks that could offer attractive opportunities despite Brexit concerns.

Merlin Entertainments

This FTSE 100 stock hit the headlines last year following the tragic incident in which four Alton Towers visitors suffered life-changing injuries in a rollercoaster crash. Unsurprisingly, this caused the stock’s price to plummet and between June and the end of September it had fallen by 20 per cent.
In the event that sterling weakens in both the run-up to the referendum or as a result of a pro-Brexit vote, we believe the stock would be set to reap the benefits on a transactional basis. Sterling weakness could make it more attractive for tourists to come into the country, and which company has the number one amount of tourist attractions? It’s Merlin obviously and with London being a disproportionately big part of their portfolio, they would be a clear beneficiary.

British American Tobacco

The £76bn tobacco giant is renowned for being a ‘stalwart’ stock with a reliable income but many investors could be deterred by its seemingly hefty price tag. Visually it looks expensive but we think it’s cheap. It’s a well-run tobacco business and they remain at the forefront of innovative product launches, whether it’s the low heat cigarette they have coming out or the range of major e-cigarette brands they have, so we think that they’re in good shape. Primarily though, we like them from a valuation standpoint.

The stock has historically done well over the longer term, having outperformed the FTSE 100 more than six times over the last decade with a total return of 316.25%.


Centrica could be a good play for those worried about a Brexit but who still want to buy into the UK market. The UK imports a lot of gas from Norway, which would become quite expensive; we import electricity from France which would be more expensive; but we’d probably get a compensating increase in the power price, so some of the utilities like Centrica could be a viable option. You can avoid the stocks that will suffer a particularly hard landing. For example, you can paint quite a negative picture around financial services in the short term and as economic growth in the UK is likely to struggle too you don’t want to hold any purely UK based firms.

Utilities giant Centrica has been hit particularly hard by the plummet in commodity prices and the fall in household bills over the last 18 months, announcing last month that its energy profits were down to £255m during 2015. As such, it confirmed a dividend cut despite its major competitor British Gas announcing a significant increase in profits over the same time frame. This could mean that the stock is a good value play in the event of a Brexit given its current underperformance.

As always you should seek professional advice where appropriate from a qualified and CYSEC regulated advisor.