A guide to income vs growth for your retirement

Deciding how your savings will support you once you stop working is a critical aspect of any retirement plan.

In reality, the right approach will depend on your income needs, spending habits, retirement goals, family circumstances and attitude to risk.

At Attivo, we pride ourselves on working closely with our clients to establish what income they will need to support their unique lifestyle and objectives, and tailoring their financial plan to achieve those goals.

In this article, we’ve explored income and growth investing as two different approaches to retirement investment planning. We’ve also looked at the potential benefits and drawbacks of each, and why the right balance starts with understanding what income you may need to support the lifestyle and objectives you want in retirement.

What does “income” mean for your retirement investment plan?

Income-focused investments aim to provide you with regular payments throughout your retirement. These payments may help cover day-to-day spending or supplement other sources of retirement income, such as the State Pension, a defined benefit pension or cash savings.

Just some examples of this include:

Dividends: If you are a shareholder in a company, or invested in a fund that pays dividends, you may receive an income stream from profits. However, dividend payments can vary and are not guaranteed.

Interest: You could also receive interest payments from savings accounts, cash deposits, bonds or fixed-interest investments. This can be more predictable than dividends, although returns may not always keep pace with inflation.

Pension withdrawals: Flexible drawdown, lump sums and other pension withdrawal strategies can also support your retirement income. With drawdown, your pension can usually remain invested, which means it has the potential to grow but can also fall in value.

The benefits and drawbacks

The main benefit of an income-focused approach is that it can create a clearer link between your investments and the money you receive. This may feel reassuring when you are no longer earning a salary.

However, these payments are typically not guaranteed and can vary. For example, some months you may end up with more than you need, and other months less.

At Attivo, we aim to support our clients by putting dividends or interest either towards the income they need or reinvesting them for future potential growth. This means they only spend what they need to, and helps to reduce their chances of ending up with a potential shortfall.

We also use cash flow modelling to support the transition into retirement. This tool helps to build a clear picture of your finances, test different scenarios, and show how your money could work for you

What does “growth” mean for your retirement investment plan?

Growth investing focuses on increasing the value of your retirement savings over time, rather than generating regular payments straight away. The aim is for your investments to grow in value so they can support your future income needs, help keep pace with inflation and provide flexibility across what could be a long retirement.

Examples of growth-focused investments can include equities, growth funds, index funds, investment trusts, property funds, multi-asset funds, global markets, emerging markets and reinvested dividends. These investments can rise and fall in value, so they usually need to be considered as part of a wider plan that reflects your goals, timescales and attitude to risk.

The benefits and drawbacks

Growth investing may be particularly important if you retire in your 60s and need your money to last for several decades. The trade-off is that growth-focused investments can be more volatile. If you need to sell investments during a market downturn to fund withdrawals, this can affect the long-term sustainability of your retirement pot.

With the right financial planning, however, you’ll be supported to align your finances to your specific needs, and be more prepared for any potential market turndowns.

Finding the right balance

Finding the right balance between income and growth starts with understanding what income you may need to support your lifestyle and objectives in retirement. From there, you can consider how your savings and investments could be structured to provide income when you need it, while keeping some money invested for future growth.

For some people, this may mean focusing more on regular income to cover day-to-day spending. For others, particularly those with secure income from other sources, it may mean keeping more invested for growth and flexibility. A financial planner can help you assess your income needs, wider objectives, attitude to risk and how long your money may need to last, before shaping an investment approach that reflects what you need your money to do now and in the future.

Why your retirement stage matters

Your priorities may change throughout retirement. In the early years, you may want more flexibility for travel, hobbies, home improvements or supporting family. Later, your spending patterns may change, and you may become more focused on security, care needs or passing wealth on to loved ones.

This is why a retirement strategy should not be viewed as something fixed. The balance between income and growth may need to be adjusted over time as your lifestyle, health, family circumstances, investment performance and tax position evolve.

Key risks to consider

There are several risks to think about when deciding how to invest for retirement. Inflation can reduce the spending power of your money over time. Market volatility can affect the value of your investments. Taking withdrawals during a downturn can also have a lasting impact, as you may need to sell more units when prices are lower.

Another important consideration is longevity risk: the possibility that your money may need to last longer than expected. This is one reason why growth can still have a role to play in retirement, even when generating income is a priority.

Tax considerations

Tax can also influence how you draw income and where you hold investments. Pension withdrawals, dividends, interest and investment gains can each be treated differently for tax purposes, depending on your personal circumstances and the tax wrapper used.

Taking too much from a pension in one tax year could also affect the amount of tax you pay, so it is important to plan withdrawals carefully and review them regularly.

In summary…

An effective retirement investment plan doesn’t start with deciding between income and growth investments, but instead, with an understanding the income you may need to support your lifestyle and objectives, and how your savings and investments could help provide that over time.

By working with a financial planner, you can explore what you need your money to do now and in the future, review the risks involved, and build a strategy that remains flexible as your circumstances change.

Get started today with your free retirement consultation

It’s your chance to talk through your goals, explore what retirement could look like for you, and understand the options available. Whether you’re planning ahead or already approaching retirement, our team can help you take the next step with more clarity and confidence.

Important information

We offer a free initial consultation to discuss your goals and next steps. If you decide to go ahead with advice, charges may apply – these will be explained before you commit.

This article is for general information only and does not constitute financial advice. The value of investments can go down as well as up, and you may get back less than you invest. Pension and tax rules can change, and their impact will depend on your individual circumstances. You should seek regulated financial advice before making decisions about your retirement income or investment strategy.