With the average client in review aged 63 and their average pensions and investments worth £315,000 according to our latest analysis, security and sustainability of income during retirement will be top of mind for many.
Client queries such as: ‘Can I retire?’ from clients in their late 40s to their 60s and ‘Will I run out of money?’ or ‘Will I be OK?’ from clients who are already retired, are fast rising up the frequently asked questions list at review time.
According to the Office of National Statistics, around a quarter of a million people a year are expected to enter the cohort aged 45-75+ over the next decade, rapidly growing a group that is already almost 30 million strong.
The Financial Conduct Authority’s study last year revealed that most of these people are neither satisfied with their financial position, nor confident around what to do about it.
With UK markets having recently climbed to within a few per cent of 2018’s historic highs and an uncertain world full of political and economic drama that makes market falls as likely as rises, answering questions around security and sustainability of income is challenging for advisers.
The same is also true for investment managers who, in the central risk profiles four through seven have on average taken on more risk into their portfolios in pursuit of returns and income, as demonstrated by their greater volatility and maximum drawdowns.
So, in this environment of increasing demand for certainty but a much less certain financial environment, how should advice businesses respond?
From surveys of our own clients, the answers we never hear are: ‘We need to find the next income fund that will shoot the lights out,’ or ‘How do we build a portfolio which will beat the market?’
However, we do hear: ‘How do we help our clients plan through retirement and prepare for the risks involved?’ and ‘How do we help clients in decumulation build portfolios that will deliver a good return for the risk they take?’
These questions are best answered through risk-based financial planning; by reviewing the client’s current arrangements and circumstances, by building a cash flow plan reflecting the range of likely returns (good and bad) aligned to their agreed risk profile, and then by researching and recommending investments or portfolios that are of a suitable risk.
Done well and using consistent assumptions around risk throughout, the client’s understanding and confidence in their financial situation and their preparedness and capacity to manage the risks that lie ahead ought to lead to a better night’s sleep for them and an even more satisfied and retained client for the business.
In a more uncertain world in which the stakes are high for those preparing for, or who are already in retirement, the assumptions used in the cash flow planning exercise are central.