Most individuals whether they are high net worth or not, will be forced to draw down, to some extent, on investment capital over their lifetimes to meet their financial needs. The biggest risk to which investors are exposed to is therefore the risk of uncontrolled capital depletion. Uncontrolled capital depletion is where an investor is taking capital or raising the yield on a portfolio without addressing the impact on the ability of assets to meet needs over time and where the portfolio is not structured to meet these needs as and when the arise. Why is capital depletion a fact of life? The interest and dividend income from a portfolio is often insufficient to meet all an investors needs both now and in the future. To meet the balance of expenditure, capital needs to be drawn from the portfolio. Many individuals want to be able to maintain a higher lifestyle in the first few years of retirement while they have the health to enjoy it. Living off only interest and income does not always provide this necessary flexibility. It does not make sense for an individual to have saved throughout their life only to find that they can only spend the interest or income generated by these savings. There are only two ways in which you can prevent depletion of capital. One is to reduce the financial demands on your assets. The other is for the return on your assets to exceed the rate at which you are spending capital. One has a negative affect on your quality of life, while the other cannot be guaranteed or relied upon.
You can of course increase the income from a portfolio without depleting capital today. Just increase the amount invested in interest bearing investments. The problem here is that these types of investments are exposed to inflation risk and ultimately incur a capital depletion risk. Over a 10 period a 2% annual rate of inflation is equal to a loss of capital in real terms of 22%. All other things being equal, it also means a loss of income of 22%. If the investor wants to maintain the level of income, they may have to draw down on capital. Advisors who only structure portfolios for today are ignoring investors’ long term problems. | 
