And as retirements typically last longer now, the challenge presented to advisers is to operate a portfolio that has the right assets to grow in line with inflation in future, while also producing sufficient income to enable the client to retire today.
And the greater the prevailing level of inflation today, the greater the need to invest in assets that can pay a high yield today, even if those assets offer little long-term growth potential.
Funk says one way to square this circle is for clients to take income from capital gains.
He says quite often they will target a “natural income” of 3.5 per cent, that is the income generated from the dividends on the equities and interest payments from the bonds, while clients needing a greater level of income than this can sell some of the growth investments they have made and which rise in value.
For example, if one owned a US tech stock, and it rose by 10 per cent, one could sell some of the holding to provide an income today, while retaining the rest of the holding to capitalise on future share price gains.
Regulatory changes
Fahad Hassan, chief investment officer at Albemarle Street Partners, says that in addition to the demographic factors, regulatory changes have created new challenges for advisers with clients looking towards retirement.
He says: “Pensions freedom has exposed income investors and retirees to challenges historically reserved for actuaries and large annuity providers. Chief among them is inflation.
"Rising inflation not only undermines the buying power of investment income, it also impedes the portfolio returns. Investors risk wealth destruction as central banks try to contain inflationary forces.
"Higher policy rates cause a repricing of all asset classes. As the cost of money is ratcheted up, longer dated bonds and growth equities initially suffer the largest losses. Investors can mitigate these risks by owning shorter dated government and corporate bonds and allocating to value equities."
Hassan adds: "Portfolios will also benefit from owning high-quality sources of income such as infrastructure funds. As rates continue to rise however, the risk of a recession rises and value equity exposures should be trimmed.
"Rising policy rates give investors the ability to de-risk portfolios by allocating to cash and short-term bonds. This opportunity should not be ignored as it could protect portfolios from more meaningful drawdowns, which could endanger longer term outcomes.”
