As your clients transition from accumulation to decumulation, the risk-return landscape also transitions, from ‘maximising returns for a given risk tolerance’ to ‘creating greater certainty of income’. How can you best mitigate the uncontrollable risks, so your clients achieve their retirement income and lifestyle objectives?
Australians are experiencing a major societal transformation resulting in living longer, healthier lives. For those transitioning to retirement – or already there – providing for 25 plus years of retirement can be daunting. There’s a mix of excitement and fear; the opportunity to realise dreams overlaid with concern that retirement savings simply won’t last the distance.
As your clients transition from accumulation to decumulation, their investment objectives change from amassing wealth to generating retirement income to meet their lifestyle goals. The risk-return landscape also transitions, from ‘maximising returns for a given risk tolerance’ to ‘creating greater certainty of income’.
Prior to this transition is a good time to sit down to review the risks each client may face, to ensure they understand the potential implications for their retirement income and lifestyle.
Some risks come with some degree of control for most people: the timing of retirement, the quantum of retirement savings and, once retired, the rate of withdrawal. Each can be influenced by you or your client. However, unforeseen circumstances can often result in early retirement, while unexpected financial constraints may reduce the extent of funds allocated to retirement.
Other risks cannot be controlled. Such ‘uncontrollable’ risks are often interrelated and may have longer term ramifications for your client: in isolation or together, these risks could impact their investment risk tolerance, see them reduce spending or cause them to make unwanted lifestyle adjustments. Market risk and the related sequencing risk can affect the value of retirement savings. This may result in behavioural biases away from growth assets, which can in turn exacerbate longevity risk.
While some of these risks can be managed by educating your clients, they can also be managed, wholly or in part, by careful portfolio construction that balances risk, offers some capital protection and a delivers income.