Chasing high income returns from investments to boost retirement income is too risky in an age of low interest rates, say financial experts.
Looking for higher than average returns from savings and investments means taking a gamble with money that is unrealistic.
Taking a balanced view is best for investors, says a paper from financial firm Royal London, as being ultra-cautious with savings is just as bad as taking too many risks because retirement income will fall short.
The study examines how a range of investments have performed in recent years, comparing average yields with current yields.
The result is yields were much higher before the financial collapse in 2008.
High risk strategy
Trevor Greetham, head of multi-asset at Royal London Asset Management said: ‘The strategy of hoping to generate enough income in retirement from the natural yield on investments may have worked before the financial crisis but is highly risky in today’s low interest rate environment.
“Savers need to realise that chasing after high yielding investments today can involve investing in an unhealthily narrow range of assets that could suffer large capital losses as interest rates rise.
“Our research shows that it is possible to have a good standard of living in retirement by investing across a risk-controlled mix of assets, targeting both income and capital growth. Investment conditions today are a world apart from those before the financial crash, and retirement investment strategies need to change accordingly.”
Investment yields – 1998 – 2018
Source: Royal London
Market stress
“Chasing high natural yields in a low return environment almost inevitably involves taking a large risk with capital,” says the report.
“It also leaves investors with a poorly diversified portfolio which exposes them to considerable volatility during periods of market stress. The chart shows the sort of natural yields offered by various asset classes in the decade before the financial crash and the sort of yields that they generate today.
“Those seeking an adequate level of natural yield are now driven towards ‘exotic high yield’ investments like peer to peer lending and aircraft leasing, whereas a much broader range of traditional investments used to generate a decent regular income.”
