Slaying The Dragon – Part Two

In part one, we highlighted that retirement is an income problem. In part two, we will discuss how this can be achieved.

For the purposes of this article, there are really only two kind of investments from which you can choose: fixed income investments, and rising-income investments. Without stating the obvious, the more fixed-income you hold in a world where costs keep rising, the greater your chances of running out of money. Whereas the more rising-income investments you hold, the greater your chance of keeping pace.

Fixed-income investments, such as money market funds, bonds, gilts and fixed annuities have always been thought of as being “safe”. Your view on this will depend on your view on the correct definition of risk.  Is it losing your money or running out of money? A rising income most reliably
comes from the constantly rising dividends of the great companies in the UK and the world. In other words, EQUITIES.

Since 1984 (almost 30 years – the average length of a couples retirement) the FTSE all share has risen from 1108 and currently stands at 5699, a rise of 514%. In that period, there have been single year declines of -10.5% (1985), -12.5% (1990), -11% (1994), -14.7% (2001), -23.4% (2002) and more recently -30.9% in 2008. (Source – FT)

When you finally accept and embrace the idea of defining true safety in terms of the preservation (and even accretion) of purchasing power in retirement, you see that equities are much safer than bonds. There has never been a 30 yearrolling period where equities have produced a negative return, even if you ignore dividends. That’s the real tragedy of today’s so called risk- averse retiree: not that he’s going to be killed fighting the wrong dragon, but that he is going to be killed fighting a dragon that doesn’t exist.