This scenario dictates that capital of £335k is required which equates to an initial sustainable withdrawal rate of 2.4% (£8k divided by £335k x 100).
Next, the discretionary spending:
This discretionary spending is plotted to age 85, with the view that 65 to 85 will be the clients’ most active years. A lower probability of success (70%) can be assumed to reflect the nature of this tranche of income. This identifies that capital of £174,500 is required, which equates to a sustainable withdrawal rate of 6.9%.
Of course, this example brings forth further questions;
- What if they have less than £335,000? Can other assets such as property be used to cover any shortfall?
- What if they have £400,000 in funds? Are the clients prepared to take a higher risk with the discretionary element, by using a lower probability of success?
This also addresses the need for ‘flexibility and access’. These are often cited as over-riding reasons for remaining invested, despite the risks. Measuring capacity for loss in this way in decumulation pins down what the money is really there for.
Summary
Splitting income provision this way demonstrates the shift we have seen in the retirement decumulation area recently.
Aligning these measures against suitable products allows the opportunity to grow remaining capital. This is important, as a reducing portfolio for the client also means reducing income for the adviser business.
Something that sounds simple, taking income from drawdown, can be very complex, and demonstrates the vital part that advisers play in managing client expectations.
Read our new Think report ‘Evidencing capacity for loss in decumulation’.
Tony Clark, Proposition Marketing Manager.