Prior to 2008, many retirees relied upon safe income producing investments to assist them through their retirement years. But since the Great Recession, interest rates have been incredibly low and many of those investors switched their investments to stocks, still relying upon the return on those investments to assist them through their retirement. Spectrem recently conducted research with affluent Retired investors to measure their reliance upon investment income and the impact of low interest rates on their overall investment strategy during retirement. Click here to see the study.
As you can see below, 28% of investors indicate that they do not rely on investment income to cover their monthly expenses during retirement. About 18% indicate they rely “Very Little” on investment income to cover their experts with 29% of those with a net worth of $100,000-499,000 choosing this category. As net worth increases, the percentage of investors who rely upon their investment income to cover monthly expenses during retirement increases dramatically with 56% of those with $10-15 million of net worth indicating they rely “Some” on their investment income and 33% of that same group indicating they rely “Very much” on their investment income to cover their monthly expenses.
Now, arguably, it makes sense that as wealth increases there is more reliance upon investment income because the amount of assets is larger and therefore much more likely to easily cover monthly expenses.
Not surprisingly, when retired investors were asked the percentage of their annual income that was derived from their investment portfolio, 44% of retired investors with a net worth of $10-15 million indicated that 60% of their annual income was derived from their investment portfolios. In contrast, 24% of those with a net worth of $100,000-499,000 indicated that under 5% of their annual income is derived from their investment portfolio.
It’s important for advisors to work with investors with various levels of wealth to understand their sources of annual income to determine how they will pay their monthly expenses. Those who are too dependent upon their investment income may face greater challenges than those who are less reliant upon that income should the U.S. face an economic collapse. By the same token, many of the most wealthy investors have greater sources of principal on which they may be able to rely should circumstances change.
Financial advisors should continue to speak about the importance of income as part of an overall asset allocation and financial plan. For many investors, they are unclear as to where they will obtain income upon retirement. Planning for future retirement scenarios remains critical for most investors.