The retirement journey has changed so much in recent years it now resembles a kitchen, according to Shane Balkham, with a “larder”, a “fridge” and a “freezer” stage.
Mr Balkham, chief investment officer at Beaufort, says: “Once upon a time, when the client was about to hit retirement, they simply bought an annuity and the relationship with the adviser came to an end.
“But now, life expectancy has risen so much, and annuity rates have fallen so much, that clients really need to stay invested. The cliff edge when the client retired and bought an annuity and left the market is no longer there.
“And to stay invested, that really is through using multi-asset solutions,” Mr Balkham says, adding that he sorts this out by dividing retirement planning into three phases: a larder, a fridge and a freezer.
He explains: “The larder represents the first couple of years of retirement. That bit of the portfolio should be in cash and very liquid assets.
“The fridge is the part of the portfolio you will need after about two years, when the larder is bare. The fridge part should be in reliable, income-bearing assets that can be called on when needed.”
Key Points
- Rising life expectancy and falling annuity rates mean clients need to stay invested
- In an ideal world, retirees would live off cash and not take risks
- Financial planners can look at clients’ income expectations
He says the “freezer” is a “pot of assets that you can just leave alone for years, but call on when the fridge is empty”.
According to Mr Balkham, a major way in which retirement planning has changed is that, historically, the bulk of the cash was spent in the early years, but as people live longer, they tend to spend more time in a care home, which means a significant slug of spending in the later years of retirement.
He says: “The way I would tend to look at that is, the care home is almost like an annuity stage, so that can be when, ideally, you use the assets that have built up in the freezer.”
Potential for growth
John Roe, head of multi-asset funds at Legal & General Investment Management, says the ideal situation for most retirees is to have enough cash for them to live on, and not have to take the risks associated with investing.
But he says for the vast majority of those approaching retirement, this is not an option, and so they must remain invested.
He says multi-asset funds work in this context because they offer some potential for asset growth, but lower volatility than equities.
Darius McDermott, managing director of Chelsea Financial Services, says: “As people need their income to last longer, they need to have some growth in their portfolio for future income too.
“Multi-asset funds can balance growth assets and those with growing dividends, with those that already have a decent yield. The other important thing for a client to remember is they should only take the income they need – not more just because they can. This simple discipline can help make pots last a lot longer too.”
