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Achieving a sufficient retirement income portfolio

We are living through a revolutionary period in investing and portfolio allocation. All time low-to-no yields here in Australia and across global fixed income markets have upended the foundations of retirement portfolio construction. It is not hyperbole to say that investors face a new investment reality to be reckoned with.

At Martin Currie Australia, we feel it is important that investors and advisers adapt their portfolio construction methodologies to this new reality of financial markets. With this in mind, we have produced a new white paper, Investing for a Sufficient Retirement Income in a Post COVID-19 World.

The paper examines why traditional approaches to retirement investing are unlikely to achieve most investors retirement goals and how intelligent approaches to income-oriented investing can help bridge the gap between required and available income.

A sufficient income in figures – the risk of ‘defensive’ assets

In dollar terms, every retiree’s income stream needs will be different, but a good starting point is the ASFA industry standard which suggests a couple aged 65 needs $51,300 in income per annum. [Note that we have used the mid-point between ASFA’s modest and comfortable retirement figures to create what we think is a more reasonable estimate of retiree living standards.]

A couple with $500,000 in assets will be eligible for about $30,000 from the part pension based on government income and asset tests. The $21,600 not covered by their part pension needs to be received from their investment portfolio, and a yield of 4.3% is required to generate that today.

Source: Martin Currie, AFSA

To earn that required $51,300 income at a 0.3% term deposit rate, a portfolio of over $17 million is required! Conversely, if a retiree had a $500,000 portfolio in 2008, the ~8% yields available would have met their income needs, but at today’s rates the $500,000 portfolio would not even provide for a month’s expenses.

It was clear in 2010 that when defensive asset yields fell, the resulting income from a traditional defensive portfolio would not meet these income level and income characteristics and risked sending a retiree’s hard-earned capital into a downward spiral without any capital growth to replenish it. We also knew that the age pension would not be a sufficient safety net for a comfortable retirement.

Asset allocation and risk from a sufficient income perspective

Our hypothesis in 2010 was a ‘sufficient income for life’ retirement solution was more like an asset liability matching problem, and we would need to move away from the Markowitz-based so-called ‘low risk’ defensive assets which were low growth with high income volatility, and into higher-growth equity allocations.

This is because when retirees are relying on the income generated by investments for their required drawdown, how that income stream behaves and grows over time is important. Thus, the attractiveness of different asset classes is significantly different when viewed through the lens of income volatility and growth.

For instance, most multi-asset retirement products assume is that when people reach 65, they automatically become more risk averse and should move away from ‘risky’, growth-style assets and towards ‘defensive’ assets.

We do not agree. So-called low-risk defensive assets have delivered low-to-no income growth with high income volatility over the past decade.

Instead, our research indicates investors will benefit from approaching retirement portfolio construction through the lens of income volatility. From this perspective, not all growth assets should be considered ‘high risk’ and all defensive assets ‘low risk’.

Instead of total volatility as a standard risk measure, we believed that for retirees, the concept of income stability, or in risk terminology, income volatility is a better proxy for the risk of impaired living standards. Income growth is also important to protect income against rising inflation.

As the chart below shows, the attractiveness of different asset classes is significantly different when looking through a total volatility lens. The more risk that you take in terms of capital volatility, the greater expected return you are likely to achieve out of each asset class along an upward sloping efficient frontier (left), and the retiree income volatility lens (right), where the level of income and income volatility is the critical issue.

Past performance is not a guide to future returns. The investment vehicles shown may have different risk profiles and a direct comparison may not be appropriate. Martin Currie Australia, FactSet, Morningstar Direct; as of 31 March 2021.

Not all equities are created equal - a sufficient income approach

Retirees require a reliable income stream to replace the wages they received when they were working. Thus, when constructing retirement portfolios, it is important to focus on the actual dollar income generated over time, rather than the markets traditional look at headline yield percentage.

This perspective leads to higher equity allocations but critically, not all equities are created equally.

The best equities for the retiree portfolio will be different from those of the accumulation investor. The sustainability of income, future income growth and diversification of income sources must be carefully considered within the choice of growth assets.

With this in mind, we build equity portfolios from the bottom up, and employ unique methodologies designed to secure a sufficient income for clients. Some key characteristics of our approach (more detail is included in the full paper) include:

  • A truly sustainable dividend
  • A focus on quality
  • Benchmark unaware construction
  • Maximising franking credits
  • Australia specific inflation targeting

The result is often a portfolio that looks different from both traditional equities and other income-focused approaches to deliver on key aspects of our ‘sufficient income for life’ philosophy.

Innovation towards a sufficient income for life 

Our Martin Currie Equity Income, Real Income and Diversified Income Funds are aligned towards generating sufficient income for life, and focus on achieving:

  • a high and stable franked income stream to support annual expenses
  • income growth for inflation protection, and
  • capital growth to manage longevity risk.

In our paper, we compare these retirement income strategies across several metrics, versus traditional lower-risk income alternatives such as term deposits, bonds and defensive balanced funds, as well as other categories such as balanced funds, broader equities and a rules-based high-yield index approach.

While the risk profiles vary, our retirement income strategies often deliver the best probability of beating an income return target, compared with the income alternatives.

Towards a sufficient income for life

Despite the short-term impacts of COVID-19 on Australia equities, our retirement income strategies with a focus on a high and stable franked dollar income stream, through diversified sources of income and capital growth, were able to provide income in-line with our objectives during 2020.

Income alternatives for retirees who need a high dollar income stream have continued to be insufficient both pre, during and post-COVID-19, with lower income and capital outcomes. Should income and capital fall into a downward spiral, and retirees be forced on the age pension in the future, the consequences for the whole economy and future generations are concerning.

Read the full white paper here.


Reece Birtles is Chief Investment Officer at Martin Currie Australia, a Franklin Templeton specialist investment manager. Franklin Templeton is a sponsor of Firstlinks. This article is general information and does not consider the circumstances of any individual. Past performance is not a guide to future returns.

For more articles and papers from Franklin Templeton and specialist investment managers, please click here.


July 24, 2021

Is it the noise that makes it complicated,or seemingly complicated?
When I started I hadn't a clue,some would say I still haven't .
Never seen a financial planner,read a lot for years and eventually worked out that nobody can predict the future.Thought if I could get 15- 20K a year in dividends,a bit pension,and a bit super,things would be good .
Values kept building as dividends got reinvested,which produced more dividends.I thought I was watching a dog chasing it's tail,faster and faster.
Then I thought if I can reach around 80% of my tradesman income in dividends,and a bit super,great.
Doing my tax one year I realised my dividend income was higher than work income.
I never worried about tax.Then one day I just put my notice in and retired .
The highest earnings I have had in my life happen now.The annual tax bill is the most it has been in my life,plus the total lack of pension that saves the govt a lot.

All just by thinking I will have to keep this as simple and easy as possible.

July 22, 2021

Graham, I think the problem is the obsession (via marketing departments) with "income". Income, meaning dividends, interest, franking credits etc is just one part of the overall equation. OK I get it, more income means less need to sell down assets to fund expenses which is always appealing. However people need to understand total return is the goal. OK, its harder having to sell some assets to generate fresh cash (by definition a proactive step) but in general high income assets tend to be low growth. Plot 5 or 10 year total return against dividend yield and that should be reasonably clear. Now that the traditional 40% safe (ie cash/fixed interest) provides 3/5ths of sod all in income people are looking to replace it. You really can't (as income) and all these articles based on some false promise of better income are a bit shonky in my view. I haven't gone forensic but the morningstar model etfs are a good guide. The "growth" portfolio, which is 70% growth, 30% defensive has 8% or better total return over 5 years and since inception. 35% is in international equities which pay about 1% in income (nil franking credits). Only 23% is in Aust equities, so franking credits have limited boost here. Plus 30% combined in fixed interest & cash; paltry income going forward as well. So out of 8% total return maybe 2% is income, the rest growth in asset value. So why do we have articles so biased towards income? (answer - marketing departments). I think a much better idea would be to educate your readers on how to generate income from a portfolio geared towards optimal total returns; rebalancing, taking some profits off the table etc.

July 22, 2021

Me again. For completeness perhaps an article by Peter Thornhill would help. I attended one of his seminars a number of years ago and it was one of those rare lightbulb moments in life. He sees cash as more risky than shares (and this was with much better interest rates at the time). The prime reason being no growth in capital over time reducing long term purchasing power whereas with shares both the underlying capital AND the dividends rise with time. He further suggests not checking your portfolio every day. I could go further but better if you could get Peters current views particularly with the current interest rate environment.

July 21, 2021

The difference between capital gain and dividend is when tax is paid.

Capital gain defers tax payment indefinitely and is 50% discounted for > 1 year holdings. No company tax imputed to shareholder when gain realised.

Dividend incurs annual payment of tax by shareholder offset by tax paid by company being imputed to shareholder - like taxation of wages.

Receive capital by selling shares with a capital gains discount or receive dividends net of tax and with tax credits.

Is there any significant difference in amount received over the medium term?

July 22, 2021

My answer:

SMSF has two investments in a Retired (Pension) Account, tax rate 0%.

Both earn 10% return on equity, 30% company tax.

Net profit dividend payout: Company A pays 100%, Company B pays 0%.

(SMSF) shareholder reinvests 100% of dividends and franking credits received from Company A in Company A.

Company B reinvests 100% of retained profit.

Both Company A and Company B continue to produce a 10% return on equity for 10 years.

At the end of 10 years, equity as multiple of initial equity:
Company A 2.59,
Company B 1.97.

Geoff R
July 22, 2021

thanks for running the numbers Dudley!

I suspect the difference is that Company B will have a large figure in its franking account - company tax paid that has not been (and probably never will be) distributed to its shareholders. That and of course the fact that the profits in Company A were all reinvested at a 10% return whereas 30% of Company B's profits sit in government coffers giving no return to the shareholder. If we had a different system where companies only paid tax on distributions and not on retained earnings then I suspect the outcomes would be essentially the same.

Anyway it shows why people with SMSF's love fully franked shares (and doubly so when in retirement/pension mode).

For comparison if the shareholder was instead an individual in the top tax bracket paying 47% (45% + 2% medicare) and 24.5% (45/2 + 2) on capital gains then the ratios, by my reckoning assuming the shares are sold after 10 years, would be:

Company A 1.68,
Company B 1.73

July 26, 2021

Excellent comment

Russell (a veteran adviser)
July 21, 2021

You need to circle back to meeting the retirees total income objective.

July 21, 2021

I just had a look at their website but it's hard to find where they list their fees. 

Raymond page
July 21, 2021

As a now retired adviser after 35 years of investing client savings to generate a retirement income this is 'financial planning 101'.

The first principal is that an individual's risk profile does not change just because they retire. If you were happy to own an investment portfolio that comprised 100% of Australian shares in your 50's then it is likely that you will be happy to own the same (level of risk in) your portfolio in your 70's. If you were a 'balanced investor' in your 40's then dito in your 70's.

With a more diversified portfolio opportunity (i.e. as a balanced investor verses a conservative investor for example) there is more opportunity to access different sources of retirement income. As an example, fully franked dividends, corporate debt, rental income from property trusts, floating rate notes, etc.etc.

Your commentators are nearly always theorists who apply theoretical concepts - not many actually have to walk the talk!

Dave Blythe
July 21, 2021

I would have much preferred an article such as this to come from an independent source. 

Graham Hand
July 21, 2021

Hi Dave, fair comment but we ran this in the context of a series of five articles on 'retirement income products', and each of the five focusses on a particular way to solve the problem. So we were willing to run with the product mentions more than usual as the writers explain their own approaches. I will summarise the five in an article next week.


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