Designing a retirement spending strategy that ensures clients can achieve their desired lifestyle without running out of money has never been more challenging, as advisers battle pandemic uncertainty, and record low interest rates at a time of high asset prices across a range of asset classes.
The economic fallout of the Covid-19 pandemic rumbles on, interest rates are at an all-time low, and inflation has risen above the Bank of England’s 2 per cent target. At the same time, clients’ personal and family circumstances may have changed as a result of the pandemic, perhaps forcing them to reassess their retirement aspirations.
In addition to those short-term considerations, the longer-term picture presents a suite of unprecedented range of challenges, with central bank policies such as quantitative easing have distorted asset prices, and arguably changed the risk profile of many asset classes.
High valuations for both bonds and equities challenge traditional asset allocation calls, and impact the condition portfolios are in when they arrive at the decumulation stage.
In such a world, it’s clear a ‘one-size-fits-all’ approach to decumulation will not suffice, and fresh thinking is needed from all involved.
Every client is unique
No-one could have foreseen the impact of Covid-19 on the economy or on our day-to-day lives. Job and wage cuts may have pushed back or scuppered some people’s retirement plans, while others may have embraced a ‘phased’ approach to retirement after experiencing the flexibility of working from home, something which has changed both the experience and the financial aspects of working.
Any of these scenarios could have affected clients’ decumulation plans, making a review nescessary for all involved.
During this review process, the uniqueness of each client’s circumstances becomes apparent.. Clients may have very similar circumstances might be similar, but it is extremely unlikely they will have the exact same date of birth, the same state benefits, the same size pension pot, the same lifestyle, and the same relationship status, let alone the same aspirations for themselves and any possible future beneficiaries.
Taking a flexible approach
A client’s needs and objectives can change significantly throughout their life, including beyond retirement. Their goals might shift from travelling the world to preserving a legacy for loved ones, or they might develop a long-term care need in later life. Longer life expectancy for most clients presents these challenges in a new light.
A decumulation strategy should be flexible enough to accommodate your client’s evolving requirements. A bespoke discretionary fund manager (DFM) will speak to the adviser and client on a regular basis to assess their current and future spending. They will look at whether the amount withdrawn last year was sufficient, or whether they ended up putting excess cash in a bank account. They will also look at how much is left in the pot and, if appropriate, suggest reducing spending the following year so as not to deplete the pot too quickly, with many clients spending far longer in retirement than has historically been the case.