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Retirement is a journey, not a destination

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For financial professionals only

Most people think of risk in investing as the possibility of suffering a significant loss, or of underperforming. That over the long term, the path of returns isn’t as important as the destination. Portfolios are optimised to deliver maximum return for the level of risk you take.

But in retirement, the primary risk is running out of money to support you through your lifetime. That means the journey matters. If markets fall, regular withdrawals can create a permanent dent in the viability of a portfolio. That’s why retirement investment strategies need a dual objective. As well as providing long-term returns, they need to minimise downside risk.

Guardian: a two-pronged approach

Our Guardian solution blends a range of asset classes to deliver on capital growth and downside risk mitigation for clients in decumulation.

This means:

  • A bias to pure defensive asset classes such as Managed Liquidity and Gilts within the defensive asset bucket
  • A bias to pure growth assets such as small cap and Emerging Market equities in the growth asset bucket

Ultimately, the solution lets the pure defensive assets defend, and the pure growth assets grow.

The allocation between them is dependent on risk grade, ensuring the investment outcome is suitable for your client’s risk profile. And we really do mean their risk profile, based on your discussions and advice to them; not based on a version of it through the lens of “lifestyling”, indiscriminately taking risk off the table because of their relative age.

Age is just a number

Retirement age matters. It’s the point at which your clients can access some of their pension benefits. It marks the beginning of the time horizon over which their investments need to provide for them. But it can’t tell us the end point of that time horizon, nor can ONS averages. That’s the problem with the concept of “lifestyling” – the longer the time horizon, the greater the need for capital growth to sustain long-term withdrawals.

Evidence from our actuarial friends at Hymans Robertson highlights that if the portfolio Risk Grade is too low, its ability to sustain withdrawal rates for an extended period is compromised. For a Risk Grade 3 portfolio there is around a 75% chance that portfolios would not last longer than 30 years. Limited risk constrains capital growth, and growth is required to sustain the pot size.

If viability of the pension pot is the key risk in decumulation, then strange though it may seem, the lower-risk portfolio may be a higher-risk approach.

Why income is an outcome, not an input

For clients in decumulation, their primary concern is securing an income in retirement. But a pure income approach is not the obvious solution it seems. Chasing yield can lead to a concentration in undervalued assets given the inverse relationship between price and yield, and we know value as a style has long been out of favour. It can also lead to a higher exposure in higher risk assets – particularly in the credit space – because investors are paid a risk premium for those investments. The Guardian approach is one of total return, rather than higher yield.

Where Guardian does factor in income, is our approach to liquidity. This is vital in decumulation given the need to support regular withdrawals of income. Guardian therefore looks to limit the allocation to illiquid asset classes such as Property.

Retirement risk conundrums

Retirement investing requires a different approach to risk because the most dangerous risk to the client is different. To achieve your client’s retirement objectives, you need to strike a fine balance between income withdrawals in all market environments, and the need to sustain those withdrawals over an unknown length of time. Your decumulation solution needs to support drawdown, protect on the downside, and allow for growth – come what may. Risk taken in the portfolio needs to reflect time horizon, not just time of life.

If you would like to know more about Guardian and how it can support your retirement planning strategies, please get in touch.



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