Ian Anderson explores retirement income vs retirement capital

Ian Anderson
Ian Anderson

Ian Anderson, Chief Investment Officer at Grindrod Asset Management expands on the complex world of saving and planning for retirement. In focus is the challenge of pursuing retirement income that is inflation-hedged both before and during retirement, Anderson sets forth the theory that supports the solution in this thorough article. – LF

By Ian Anderson, CIO at Grindrod

Over the last two decades, the provision of a pension in retirement has undergone dramatic changes. Not only did the introduction of defined contribution funds shift the responsibility from the employer to the employee, but more importantly, the investment management industry shifted the emphasis away from a focus on securing an inflation-hedged income through retirement to maximising your capital on the day your retire. They did this through the introduction of products like living annuities, which calculate the level of retirement income as a percentage of capital and developed administration systems to facilitate the sale of investments to fund retirement.

While trying to secure an income in retirement and aiming to maximise capital on the day of retirement appear difficult to control and manage for, we’d argue that focussing on building towards an acceptable level of inflation-hedged income in retirement is a far easier objective to achieve. It also allows for a more objective approach to retirement planning and if done diligently can eliminate the adverse effects of large market moves in the years leading up to retirement and throughout retirement. It also eliminates the anxiety that builds in investors as they near retirement, which can often lead to the investor making dramatic changes in their portfolio with dire consequences in retirement.


An investment in a portfolio of growth-oriented, income producing equity and listed property securities not only offers investors the opportunity for long-term capital growth, but also offers investors a means to budget their retirement income both before and after they retire. At Grindrod Asset Management (GrAM), we introduced the concept of an income coverage ratio to the market in 2014.

The income coverage ratio measures the ratio between the income being produced by an investment against the income required by the client.

While saving for retirement, investors can regularly measure their income coverage ratio as the level of income produced by their growing retirement savings against their current annual salary. Together with their financial advisor, the investor can then set a retirement target and can retire when that target is met, which may even be a few years before the mandatory retirement age.

To illustrate the point, consider this hypothetical example. An investor and their financial advisor determine that an income coverage ratio of 75% would be the threshold at which point the investor would feel comfortable retiring. This means that when the income being produced by the investor’s retirement savings is greater than 75% of their current annual salary, they would be in a position to retire. If the income coverage ratio exceeded 100%, then the investor should definitely retire because they would receive more income from their retirement savings than their annual salary.

Dividend income from large South African industrial and financial companies and distributions from listed property companies and far more stable and predictable than the share prices of these companies. This means that focussing on their income streams, rather than their share prices, will yield vastly better results when planning for and into retirement.


Unfortunately, there are not many investment vehicles available to South African investors that focus on consistently growing income at or above inflation over time. These efficient income portfolios, a term coined by Morningstar and Ibbotson Associates in 2012, will do a far better job of meeting the income needs of retirees than total return portfolios.

GrAM’s Payers and Growers® range of collective investment schemes are an example of efficient income portfolios in the South African market. They offer investors a high level of initial income and in most cases, grow that income at or above inflation over time. They are therefore ideally suited to those investors who are focussed on securing an adequate level of inflation-hedged income both before and through their retirement.

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