Achieving a long and successful retirement is the ultimate goal for many. They believe that if they put the effort into saving, investing and growing their retirement fund, the living will be easy. But in these days of complex pension rules and potentially lower returns, building up a pension is not the end of the story. Cameron Walker, head of private banking, Jersey, at Nedbank Private Wealth, explains how managing your money through retirement can bring a whole new set of challenges and risks
THE key challenge is how to convert your accumulated assets – your investments, pensions and savings – into an income that will sustain you throughout your retirement, particularly when you have no idea how long you will live for.
Known as the decumulation stage of retirement planning, it is often likened to mountain climbing as the most difficult part of a climb isn’t always the ascent to the summit. More accidents actually happen on the way down.
And it’s the same with your finances. Becoming increasingly reliant on generating an income from your assets presents additional risks which need to be managed to ensure your retirement is a success.
Cameron Walker, Nedbank. Picture: DAVID FERGUSON (35837447)
What are the key risks?
1. Inflation risk
Compounded over a long time, inflation can have a significant impact on the real value of your money. If you are retired and living on your savings, it can make it increasingly difficult to maintain the standard of living for which you planned.
The latest Jersey retail price index, published in March 2023, is 12.7%, which is probably significantly higher than most of your returns. This means that, over time, you are losing money in real terms. There is also the likelihood that the quarterly retail price index published does not reflect your particular expenses, which could be higher.
2. Longevity risk
Medical advances and better health mean we are typically living longer than ever before, but these benefits come with the risk that you could outlast your wealth.
In the UK, a couple in their early 60s today have a 25% chance that at least one of them may join the exclusive centenarian club. Many people underestimate their longevity, but it’s a possibility you should take into account to ensure your financial future stands the test of time.
3. Sequence risk
If investment returns are weak in the earlier years of retirement and coupled with potentially high withdrawals, the two can dramatically impact the long-term value of your portfolio, irrespective of whether you see higher investment returns later on in your retirement.
While sequence risk is often a matter of luck, there are steps you can take to mitigate its impact.
How can a wealth manager help?
With so many considerations to be balanced, it is vital to seek a wealth manager who can provide the specialist wealth planning and investment advice required for the decumulation phase of your retirement.
Planning
While saving and investing, you will probably have taken advice on the best way to achieve your goals. Once you reach retirement, however, it is equally important to consider the most effective way to draw an income from the wealth you have accumulated.
This requires an understanding of which assets to sell in order to fund retirement expenses and which assets to buy to ensure your portfolio does not erode in value – all without taking on too much risk and volatility. Your pension and non-pension assets should be considered alongside your overall, long-term goals when determining which assets to draw on first.
Keeping active
Alongside the wealth planning support, you should make sure your investment portfolios are being actively managed. This means an experienced investment manager will ensure your portfolio is suitably diversified and contains a wide range of asset classes – such as funds, equities, bonds and property etc – that can help to mitigate the effects of inflation risk. They can also help you to benefit from the various underlying characteristics of individual asset classes in order to meet your goals.
A dual portfolio approach
As well as actively managing your portfolio assets to generate returns, it is equally important to meet your retirement withdrawals. This is where a dual portfolio approach can help. While not appropriate for every client, many can benefit when their portfolio is split and managed across two levels of risk.
In this scenario, a cautious risk portfolio is designed to be less volatile and generate steady returns to meet your withdrawal profile, while a higher-risk portfolio aims to provide longer-term growth over your retirement period.
The more cautious portfolio also works to protect more of your capital from large market movements, due to its mix of asset classes, and helps to mitigate sequence risk. The higher-risk portfolio, meanwhile, is usually invested in riskier assets, such as equities and property, which help you to manage both inflation and longevity risks.
Your investment manager will manage the two portfolios as appropriate, to ensure the level of investment risk across both remains in line with your overall risk profile and tolerance.
Combining a dual portfolio approach with active investment management can help overcome the competing risks of longevity and sequence.
Ultimately, however, your choice of a wealth manager is not just down to technical expertise, but also a question of trust and whether they really understand your needs. You should be confident that the same due care and attention paid to you today will be sustained in the decades to come – to help you achieve financial success in retirement.
