Probably the most commonly asked, or at least thought about, financial question of our age is: "Have I got enough money to live on in the lifestyle that I want?"
Perhaps this isn’t surprising since so many of us now rely on building up a pot of money to live off when we stop or reduce our time spent working.
In the past those working for large employers might have relied on the work’s pension scheme which would promise an income for life after retirement.
That provision has diminished at the same time the demographic bulge of the Baby Boomers has reached retirement age. If that wasn’t enough, this market has been given a turbo boost following the introduction of pension freedoms in 2015.
Not surprisingly we have seen an increasing focus on the needs of clients in this situation. Much of the debate and discussion has focused on understanding the risks in managing a pot in retirement – the decumulation phase.
These are primarily:
- Drawdown i.e. a significant fall in markets. This risk is not habitual in its movements and therefore unpredictable. When drawdown does strike it can be significant and is able to cause a lot of damage to financial plans and to client confidence.
- Volatility drag. The second risk is a cousin of drawdown and its work is somewhat more subtle. We know volatility is at large from statistical analysis but is rarely glimpsed. However, its effects are insidious and persistent.
- Sequencing risk. The notoriety of sequencing risk has increased considerably over recent years. Commentators and the Financial Conduct Authority (FCA) have observed the ill effects of its work. Efforts to contain it has improved but they have so far been patchy in their success rate.
- Pound cost ravaging. The bad half of the family. The pound cost averager has been a friend to many advisers and clients over the year. Not so the pound cost ravager who works in opposition and works just at the worst time and its effects have been highlighted and commented on by many. As markets fall, more units are sold to match the income required.
- Inflation risk. Perhaps the most infamous of the risks, inflation has a long track record of damaging clients’ wealth in the long run. Despite our better understanding we need to maintain our vigilance to avoid the pain it can cause.
- Longevity risk. The last risk is perhaps the only one that is welcome. The result of longevity is that, on average, we will live longer than our forebears. The benefits of this on our lives comes with a price for investors.
