Investment Trusts: Working hard in retirement

Today’s later life savings need to work harder. Retirement is longer and more ambitious, and there may be more commitments, such as supporting education and housing costs for children or paying for long-term care. Today’s retirees need to harness all the tools available to them to ensure retirement is a time of real fulfilment, rather than worry. Investment trusts have a role to play. 

Later life savings need to go further today than they have ever done before. It is no secret that retirements are getting longer. A man aged 50 today can expect to live until 84 and has a 1 in 10 chance of making it to 97. A 50-year-old woman can expect to live to 87 and has a 1 in 10 chance of making it to 99. While the retirement age has edged higher, for many people retirement may last 20-25 years.

With the right financial resources, these long retirements can be a peaceful and relaxing end to a life well-lived, a chance to pursue all the interests that the demands of working life have prevented. Many retirees have expansive plans for travel, entrepreneurship, or to spend unhurried time with the family. The ‘golden gap year’ is now a phenomenon, with a quarter of retirees hoping to head off round the world.  ONS figures show a 37% rise in spending by over 65s on trips abroad in the last four years alone.

But there are other pressures on later life funds – care costs, for example. NHS data suggests that around a quarter of adults (24% of men and 28% of women) aged 65 and over needed help with at least one daily activity. The need increases significantly with age, with over half (52%) of adults aged 80 and over needing help with day to day living.

Then there’s the problem of the next generation. Many older people recognise that younger generations are struggling with higher housing and education costs. They want to help. Many need to balance their own income needs in retirement with a desire to ensure that their children and grandchildren are not left struggling with debt.

This changes the dynamic for a retirement portfolio. It may not be enough to simply put retirement savings in low-risk assets and hope for the best. Retirees have to harness investment growth and compounding as effectively as possible. This has implications for their investment approach, and this is where investment trusts can help. 

Inflation protection

Any retirement portfolio needs a strong focus on assets that protect against inflation. The past few years have shown why: a basket of goods that cost £100 in 2020 now costs £128. That means investors have needed a 28% return just to maintain their purchasing power.

In practice, this calls for prioritising stock market investments – which have historically offered better inflation protection – over bonds, which generally haven’t. However, while stock markets have delivered handsomely on growth, it has come with a level of volatility that may be uncomfortable for many retirees. They cannot re-earn their wealth and watching the capital value of their savings bounce around can be unsettling. Across the Aberdeen range of investment trusts, we see three main ways that may help to solve this conundrum. 

Targeting dividend growth 

The first is to target companies that can grow their payouts to investors over time. This gives investors the best possible chance of outpacing inflation, providing greater protection of the purchasing power of retirement savings over time.

Dunedin Income Growth Investment Trust and Murray International Trust prioritise companies that grow their dividends and, as a result, have reliably grown their payouts to investors to date. Murray International Trust is an AIC “Dividend hero”, meaning the trust has delivered year on year income growth for more than 20 years.

Prioritising dividend growth has the secondary effect of investing in companies that tend to show less volatility than the market. For a company to grow its dividends, it needs to grow its earnings. To do this, it should have a sustainable competitive advantage, such as intellectual property, brands, scale, or a powerful network effect, be led by an experienced management team, have sound financial characteristics and robust growth opportunities. This helps ensure greater stability of capital returns as well.

Unstoppable long-term trends

The global economy is moving fast. Technology is disrupting more parts of the global economy, geopolitical tension is rife and the norms that have governed international trading relationships are being turned upside down. Investors looking to grow their capital and income over time will need to make sure they are on the right side of these major global shifts.

Outside the UK, investors could look to the opportunities in Asia. Asia remains the fastest growing region in the world, with the International Monetary Fund (IMF) forecasting growth of 5.1% for emerging and developing Asia this year, outpacing developed markets by around 3x[6]. abrdn Asia Focus targets smaller, fast-growing companies across the region, while abrdn New India Investment Trust specifically focuses on opportunities in India, currently the world’s fastest growing major economy. Looking to these markets has the added bonus of diversifying a retirement portfolio, which should help smooth investment performance over time.

The investment trust structure is a natural home for these investments. The closed-ended structure allows fund managers the broadest possible investment choice, unconstrained by the need to manage inflows and outflows. This also allows exploration of markets across the world, including less liquid markets. 

Investment trusts can be a vital tool in supporting a long and ambitious retirement. They may help deliver reliable growth in income, while managing the inevitable fluctuations associated with stock market investment. They can be a part of delivering the financial freedom for a fulfilling later life.

Important information

Risk factors you should consider prior to investing:

Other important information:

The abrdn Asia Focus plc Key Information Document can be obtained here.
The abrdn New India Investment Trust plc Key Information Document can be obtained here.
Dunedin Income Growth Investment Trust PLC Key Information Document can be obtained here.
Murray International Trust PLC Key Information Document can be obtained here.

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG, authorised and regulated by the Financial Conduct Authority in the UK.

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