Mr Balkham, chief investment officer at Beaufort, says: “Once upon a time, when the client was about to hit retirement, they simply bought an annuity and the relationship with the adviser came to an end.
“But now, life expectancy has risen so much, and annuity rates have fallen so much, that clients really need to stay invested. The cliff edge when the client retired and bought an annuity and left the market is no longer there.
“And to stay invested, that really is through using multi-asset solutions,” Mr Balkham says, adding that he sorts this out by dividing retirement planning into three phases: a larder, a fridge and a freezer.
Life expectancy has risen so much, and annuity rates have fallen so much, that clients really need to stay invested Shane Balkham, BeaufortHe explains: “The larder represents the first couple of years of retirement. That bit of the portfolio should be in cash and very liquid assets.
“The fridge is the part of the portfolio you will need after about two years, when the larder is bare. The fridge part should be in reliable, income-bearing assets that can be called on when needed.”
Key Points
- Rising life expectancy and falling annuity rates mean clients need to stay invested
- In an ideal world, retirees would live off cash and not take risks
- Financial planners can look at clients’ income expectations
He says the “freezer” is a “pot of assets that you can just leave alone for years, but call on when the fridge is empty”.
According to Mr Balkham, a major way in which retirement planning has changed is that, historically, the bulk of the cash was spent in the early years, but as people live longer, they tend to spend more time in a care home, which means a significant slug of spending in the later years of retirement.
He says: “The way I would tend to look at that is, the care home is almost like an annuity stage, so that can be when, ideally, you use the assets that have built up in the freezer.”
Potential for growth
John Roe, head of multi-asset funds at Legal & General Investment Management, says the ideal situation for most retirees is to have enough cash for them to live on, and not have to take the risks associated with investing.
But he says for the vast majority of those approaching retirement, this is not an option, and so they must remain invested.
He says multi-asset funds work in this context because they offer some potential for asset growth, but lower volatility than equities.
Darius McDermott, managing director of Chelsea Financial Services, says: “As people need their income to last longer, they need to have some growth in their portfolio for future income too.
“Multi-asset funds can balance growth assets and those with growing dividends, with those that already have a decent yield. The other important thing for a client to remember is they should only take the income they need – not more just because they can. This simple discipline can help make pots last a lot longer too.”
Mr Roe agrees. He says if retirees are only gradually withdrawing funds, then the expectation is that they can look through much of the short-term volatility of assets with more growth potential, such as multi-asset funds.
Then, over the long term, their investment return helps slow the depletion of their savings. So according to Mr Roe, it is a balance of enough growth potential to sustain retirement spending while diversifying the risk taken to try to limit the risk of extreme drawdowns.
Matthew Morgan, multi-asset investor at Jupiter, says while investors traditionally used corporate bonds to add income and growth in retirement, the yield on those assets has collapsed over the past decade, meaning investors are forced to seek greater diversification.
Cardinal sins
But this can lead to problems, as Mike Coop, investment manager at Morningstar, comments. He believes there are “two cardinal sins” an investor must avoid in their portfolio as they search for income in retirement; sins exacerbated by longevity risk.
Those sins are:
- taking an income from capital.
- investing in companies that are paying too much of the cash they have in dividends.
Regarding the second sin, Mr Coop says: “A lot of UK large-cap companies have done this in recent years, and now they are cutting their dividends. Living potentially much longer in retirement means sustainability of income is very important, and maybe the traditional approach needs to change.”
Gwilym Satchell, multi asset fund manager at Invesco, says multi-asset funds should be explicit about what they are trying to achieve, by having a risk target and an explicit income target, so the client understands what will happen in retirement.
Nick Watson, multi-asset investor at Janus Henderson, believes it is likely such strategies will underperform when markets are rising strongly because multi-asset funds will have a lower exposure to equities and other risk assets, but perform better in times of market strife.
He says this makes multi-asset funds ideal for retirement planning, but clients must understand the reasons for the underperformance, and not seek to deviate from their long-term strategy as a result of it.
The advantage of multi-asset funds relative to bespoke portfolios is that the former should have lower costs than the latter, boosting the eventual returns to the retiree, says Matthew Yeates, investment manager atSeven Investment Management.
Karl Craig, investment manager at Canaccord Genuity Wealth Management says: “It’s really important for clients to work with their financial planners and, where appropriate, use cash flow modelling to look at their income expectations, expenditure.
“This can help reaffirm that their risk level and therefore asset allocation is the right one, or perhaps they may be able to take a lower level of risk to achieve their financial objectives. If it’s the other way around, clients should look to revisit their income/expenditure assumptions rather than taking an uncomfortable level of risk.”
For the role that multi-asset portfolios play, they should, at the very least, be expected to deliver a real return on their assets.
And with interest rates that have been low for a decade already now set to stay lower for even longer, it appears multi-asset portfolios have an even greater role to play in maintaining the purchasing power of clients’ assets and growing these assets over time.
David Thorpe is special projects editor at FTAdviser and Financial Adviser
