John D Rockefeller, reportedly America’s first billionaire, was quoted as saying, “The only thing that makes me happy is seeing my dividends coming in.”
While this was no doubt disappointing for his wife and five children, it is a sentiment that is relevant for today’s retirees.
Reliability and durability of income are important for us all, but perhaps especially so for those relying largely or wholly on accumulated wealth to generate that income.
In a world so full of uncertainty, having confidence that monthly income will be paid should allow retirees to enjoy the retirement they deserve and avoid making rash decisions in the face of market and economic volatility.
Using income-focused investment strategies to support retirement income might seem like an obvious approach but, in fact, income strategies are much less often used than the total return approach, where assets are sold to fund income payments.
If the income is sufficient to meet client needs, then there is no need to sell investments
While both low yields and the surprise cut in dividend payments at the start of the pandemic may have impacted the popularity of these strategies, there are clear signs this is changing.
BNY Investments’ latest survey research, Retirement Advice: Time for change?, found over a third (35%) of advisers always or often use income strategies, and a net 7% of firms expected to make greater use of them during 2025.
We expect this is, at least in part, driven by regulatory expectations that investment solutions need to be better aligned with client needs in retirement.
While we have no axe to grind on whether one retirement investment approach is better than another, in our view there is a clear case for greater consideration of income strategies.
The obvious starting point is that for a client who wants income, investing in a portfolio that is naturally generating income should be a useful match for that goal.
Richard Parkin: Is an income-led approach old skool or new rule?
If the income is sufficient to meet client needs, then there is no need to sell investments, meaning that the capital that is generating income today stays available to generate income tomorrow. The challenge of sequence of returns risk is sidestepped, and the durability of income is strengthened.
As the prevalence of defined benefit and generous state pension wanes, clients will be looking increasingly for their investments to generate stable and growing income. While income levels can and do vary, running a diversified portfolio of income generating assets can deliver a reasonably stable and predictable income flow even when markets are volatile.
Moreover, in an environment where inflation is higher and more likely to deliver nasty shocks, we may be better able to hedge against cost-of-living increases where we hold assets that themselves are expected to generate income that grows in real terms.
During the low interest rate environment that persisted after the global financial crisis, it was possible to generate stable and growing income. Alternative assets such as infrastructure and renewable energy offered attractive inflation-linked yields, as they do today.
The change to the inheritance tax treatment of unused pensions is likely to drive demand for income
Certainly, the return to a more “normal” interest environment does mean we have a greater universe of investments to choose from when generating income, giving the approach even greater potential to meet client needs.
Finally, the change to the inheritance tax treatment of unused pensions is also likely to drive demand for income, either within pensions themselves or from other assets where there may be scope to gift surplus income more efficiently than gifting capital.
While each client’s circumstances will be different, an investment approach that focuses solely on growing capital may be less appropriate in an environment where capital taxes are increasing.
So, can income investing truly bring everlasting happiness? That’s a claim that is unlikely to make it through any asset manager’s compliance department, but the case for income investing in retirement is becoming more compelling.
For advisers wanting to give clients confidence that income requirements can be met through volatile markets, it’s certainly an approach that’s worth considering.
Richard Parkin is head of retirement at BNY Investments
