As a client enters the last decade prior to retirement, how should they think about diversification?
Historically as the date to start drawing a pension nears, the approach has been to reduce equity exposure and increase fixed interest exposure as a way to reduce volatility.
But low yields and longer life spans in retirement are changing the retirement equation, while high bond prices may mean they aren’t the low volatility assets of the past, so do clients need to think differently as their decumulation date nears?
For many, retiring in the way our parents did hasn’t been possible for 20 years, but memories of the past are hard to forget. But they must be, as a working life with one employer with the reward of a generous final salary pension can no longer be relied on. Planning for retirement now requires 21st not 20th century thinking.
Ever since pension freedoms were introduced back in 2015, people have had more control over what they do with their money when they finish working and how they live their lives. We have seen the benefits that not having to buy an annuity can bring with many more retirees enjoying the end of their working lives knowing what they can and can’t draw down.
However, with this freedom has brought a concern. Many are now approaching retirement worried they do not have enough to see them through in their old age. Many might wish they could hark back to previous times when interest rates were generous and safe haven assets did what they said they would do.
However, it’s not just the investment environment that has given people cause for concern. Spiralling social care costs and the fact we are living longer than we did just a few decades ago has made those final years in the accumulation stage some of the most important when it comes to asset allocation. Afterall, decisions made in those final 10 years before retirement will have a lasting impact on the longevity of an investment pot.
Understand the situation
We all want to have a date when we give up work for good – the first day of the rest of our lives. Realistically it is rarely like that as these days people want to wind down from work or keep something burning on the side. But understanding a client’s ambitions is the first step to setting up the asset allocation strategy for the final 10 years of their working lives.
If you don’t already know a client’s planned retirement date, then you need to ask them. From there you can quickly get a grip of how their retirement journey looks to them. For example, do they plan on travelling the world in the early years of retirement before settling into a more relaxed pace of life? Do they want to downsize and live a simpler life? Or are their biggest concerns around leaving a legacy, gifting much of their wealth and ensuring others are looked after?
