Designing a retirement strategy for clients after the pandemic

Decumulation strategies also need to adapt to the shifting market backdrop. As we have seen over the past 18 months, share prices, exchange rates and commodity prices can swing wildly from one day to the next. DFMs usually have a team of experts whose job is to monitor and react quickly to market movements, thereby minimising the impact of sudden losses on the client’s portfolio.

While investing for retirement is a  longer-term project, the ability of an investment manager to react to the shorter-term considerations is also important as clients near their retirement date. 

Mitigating the risks 

Although the stock market has largely recovered from the crash of March 2020, many people will have seen their pension values fall, at least temporarily. And the recovery hasn’t been without its setbacks, with investors seeing choppy swings up and down in the markets for much of last year, as both sentiment and fundamentals were impacted by the trajectory of the pandemic. 

In retirement, dips in the market can cause lasting damage to an investor’s portfolio. This is especially so in the early years of retirement, when falls in the market can result in portfolios being unable to meet lifestyle expectations over the long term.

The economic recovery is still uncertain, meaning clients could continue to see investment values move up and down over the coming months. A DFM will not only keep advisers abreast of what is happening in the market, but will also look for ways to mitigate risks in the context of the client’s individual risk profile, and the goals the client has for their own lifestyle. 

During the pandemic, we have seen clients taking a keen interest in how their portfolios work, based on the advice their adviser has given them, as a key element of our review meetings. Part of that discussion has focused on how we can split the portfolio into the client’s short-term goals and employ an investment strategy to meet those goals – for example, using fixed-term investments to match planned redemptions with income liabilities. This can avoid the need to sell down investments in an unstructured manner. 

A major challenge for those tasked with preparing portfolios for the decumulation phase is that people now tend to live much longer in retirement, and so either need a much bigger pot in retirement or to manage the income in a different way. This challenge has been compounded by historically low bond yields

Government bonds would once have formed a significant slug of the assets in decumulation, due to the reliability of the income, and the relatively low risk profile. 

Lower yields mean a different approach is needed.   

We can focus on using growth-oriented asset classes for the long term, seeking to offset investment risks like rising inflation and continued low interest rates, and helping the adviser and the client to continue to meet their goals and aspirations. The adviser then has time to focus on maintaining the quality of their advice to the client and optimising the client experience.