Targeting an income for your retirement

If you’re thinking of retiring this year and wondering how best to generate an income from your hard-earned savings, a simple, stress-free option is M&G Investment’s range of Target Income Funds. You can invest in them as a discretionary unit trust or as an underlying investment within the M&G Investments Living Annuity. 

A simple and effective income solution

Approaching retirement can create a lot of anxiety.  From a financial perspective, you’ll need to find the best possible way to generate a regular, sustainable retirement income over time, which in itself can be confusing given the rather dizzying array of post-retirement investments to choose from!

Ideally, you don’t want to have to worry about how your investment and asset allocation are being managed.  You want a certain level of income, and to know that your capital is continuing to grow over time without assuming excessive levels of risk.

M&G Investment’s Target Income Funds are designed to do just that. There are three funds, designed to deliver an annual income of either 2.5%, 5% or 7% of your initial capital investment, with a secondary focus on capital growth. The funds invest in a well-diversified and flexible mix of local and offshore equities, bonds, property and cash, and M&G’s team actively manage them in a very similar way to their flagship M&G Balanced and M&G Inflation Plus Funds.

How do the funds differ?

Because each fund is structured to generate a different level of income, the mix of their underlying assets will also differ. The capital growth potential for each also varies.

If you consider the 2.5% Target Income Fund, for example, this is a relatively low income target to achieve. Because less income is required, the fund managers are able to invest a higher proportion of the portfolio into growth assets like equities and listed property (both domestic and offshore).

While being higher risk, growth assets are more likely to deliver higher returns with moderate levels of income over the long term. This gives the fund a higher capital growth potential than the 5% and 7% options. The 7% Target Income Fund has the lowest capital growth potential, given that a relatively high proportion is being paid out as income every year. It’s best to aim for capital growth that keeps up with inflation over time, so that the value of your retirement pot doesn’t erode.

Fixed-income assets (such as bonds and cash), meanwhile, would typically have less weighting in the 2.5% Target Income Fund than the other two funds, and would be used to create sufficient liquidity for investors to be able to draw their required income.  The table below provides an overview of the main differences in asset allocation between each income option.

One of the benefits of the Target Income Funds is that they don’t have to comply with the investment constraints imposed by Regulation 28 of the Pension Funds Act, including the limits on exposure to offshore, listed property and equity assets. The fund managers are able to optimally structure each fund’s underlying holdings, which are carefully selected according to which assets are best suited to meet the funds’ objectives. This can be very beneficial these days, when people are living longer in retirement and may need to include more growth assets in their retirement portfolios to help mitigate the risk of running out of funds in retirement.

M&G Investments’ range of Target Income Funds are managed according to the same tried-and-tested, valuation-based investment process that we have followed since our inception, almost three decades ago. This means that we aim to buy assets when their valuations are trading below their long-term fair value and aim to sell them once they reach fair value or higher. This investment philosophy has served us and our clients well, particularly over the last year, with our 2.5%, 5% and 7% options generating net returns of 23.6%, 13.7% and 12.5% respectively (as at 31 January 2022).

So, if you’re looking for an all-in-one investment solution, where your underlying asset allocation is structured specifically around your income requirements, M&G Investment’s range of Target Income Funds could be the right option for you.

For more information on investing with M&G Investments, please feel free to contact our Client Services Team 0860 105 775 or email us at info@mandg.co.za.