Life expectancy continues to rise. While this is undoubtedly good news, it also presents a challenge for investors: accumulated wealth has to last much longer. Whereas the primary focus used to be on growing capital, generating a stable income stream from investments is becoming increasingly important, according to asset manager Allianz Global Investors.

Dr. Hans-Jörg Naumer

Dr. Hans-Jörg Naumer, Director Capital Markets & Thematic Research, Allianz Global Investors

The concept of longevity —living longer and healthier— is therefore about more than just health. It is also about how to finance an increasingly long phase of life. As careers become less predictable and more people choose to work part-time or take career breaks, the need for a second source of income alongside a salary is growing.

Retirement savings need to last longer

According to the United Nations, life expectancy has been increasing worldwide for decades and is expected to continue rising. At the same time, pension systems are coming under increasing pressure. The baby boomer generation is leaving the workforce, while proportionally fewer people are working to finance state pension schemes.

Meanwhile, the way we work is changing. More people are opting for part-time employment, sabbaticals or temporary career breaks. Younger generations, in particular, place greater value on flexibility and work-life balance than on a traditional 40-year career.

As a result, wealth is no longer just something to build for retirement. It is increasingly becoming a source of income throughout different stages of life.

Investing for a second salary

For many investors, the focus is gradually shifting from pure capital appreciation to generating recurring investment income. This can come from bonds, which provide relatively predictable cash flows through coupon payments, or from dividend-paying equities.

Dividends are generally less predictable than bond coupons, but over the long term they can make a substantial contribution to Total Fina Elf returns. Companies that grow their profits often increase their dividend payments as well, boosting not only the value of an investment but also the income it generates.

The past decade illustrates just how important dividends can be. A broadly diversified investment in European equities would not only have generated significant capital gains but also tens of thousands of euros in dividend income on a €100,000 portfolio. Although past performance is no guarantee of future returns, it demonstrates the important role dividends play in overall investment performance.

Diversification creates a more stable income stream

Investors who want their portfolio to function as a second salary should look beyond dividend yields alone. The timing of income distributions also matters.

European companies typically pay dividends once a year, whereas many US companies distribute dividends quarterly. By combining investments across different regions, sectors and asset classes, investors can create a more balanced flow of income throughout the year. Bonds can provide greater predictability, while dividend-paying equities offer opportunities for income growth.

Some investors also supplement these income streams by selling a small portion of their portfolio when appropriate or by maintaining a cash buffer to smooth out periods of market volatility. This can help ensure that temporary market declines do not immediately affect monthly income.

Income is becoming a more important investment objective

In the years ahead, many investors are likely to shift their focus from asking, “How can I grow my wealth?” to “How can I make my wealth work for me?”

Rising life expectancy, increasing pressure on pension systems and a changing labour market are making portfolios that generate a reliable income stream increasingly valuable. This applies not only during retirement but also earlier in life, when people may choose to reduce working hours or take a career break.

Capital growth will always remain important. However, for a growing number of investors, a steady stream of income from bond coupons and dividends is becoming an equally important pillar of a long-term investment strategy.