Planning for a longer retirement

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The importance of multi-asset investing for pension planning

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.”