Good morning and welcome to today’s Arch Capital update.
Today I am going to be talking about retirement incomes in the current environment interest rates.
Interest rates are low, and it is making it very challenging, so I am going to go through a quick diagram of how we approach this in today’s low interest rate environment.
The first thing we do is we define what we will be calling our three (3) buckets.
The first bucket is your immediate cashflow and how much you need to live off and give a bit of a safety net for yourself.
That might be about three (3) to five (5) years of your income needs in cash, fixed-interest, short-term investments – nice and secure investments. This is so you know it is always there if you need it and you know the market can move around a bit, with your investments being largely untouched.
The second bucket we look at is really that fall-back and we don’t want retirees to worry about a sudden market fall. Everyone is different in how they might perceive that risk, so in this bucket we might have investments in medium to longer term bonds and that might be five to ten years of their income requirements, some could even extend it to twelve years.
That is dependant on your level of risk aversion. We can always rebalance from this bucket back into the growth assets.
The third bucket of our portfolio is the engine of the portfolio, it is what has access to growth assets so that we have movement and growth in the portfolio and also we want to apply a diverse portfolio strategy here.
This shouldn’t be exposed to single stocks, we’re going to try to not be exposed too much to a single market, so that can diversify out our risk.
It is challenging when interest rates drop so low, we never know if they will drop lower, that seems to be the direction they are heading.
What this means for us it that we spend a lot of time looking at this and trying to work out the best solution for our clients.
Thanks for listening.