With the embedding of the pension freedom laws in various nations of the world, advisers are witnessing a significant rise in the proportion of clients looking forward to using their drawdown as the primary source of income during their retirement period. The already established solutions and processes that were designed keeping in mind about the idea of accumulation has now to be revised and adapted for staying in line with the requirements and cash flow of the clients during their retirement phase. The factors for designing the decumulation portfolios are completely different from those of the accumulation ones and hence a lot of analysis and inputs need to be given on the same.
The recent studies have shown that about 70 percent of the adviser firms do not change their investment models for the clients drawing income in their retirements and this problem is slowly getting bigger and bigger with the passing years. Further problems are also getting piled up on managing and transitioning between the portfolios and with the intensity of the same becoming graver with each passing day, a quick optimal solution point needs to be reached.
In the existing times, to tackle such challenges there is already a set of drawdown focused portfolios ready to be chosen from, with options for the clients to customize some as per their requirements and comforts. However, prior to deciding on which of the portfolio to choose, a deep understanding is must on the difference between the drawdown and accumulation portfolios and for that, there are certain factors that need to be given a deep analysis and thought about.
The portfolios of accumulation are basically based on the principle of volatility and returns, where the former is a positive factor when subjected to the client’s attitude towards risk. The basic objective for the accumulation portfolio is to maximize the capital growth for a given level of volatility and the ongoing management and monitoring of the ideal accumulation portfolio will focus on the risk factors taken into account i.e. the portfolio volatility and the capital growth achieved during that level of volatility in the considered time frame.
On the other hand, the portfolios of decumulation are quite tricky and are based on the concept of income sustainability. In this case, the volatility becomes a serious issue in the early retirement phase where the pound’s losses can get much bigger and the tension further increases where not taking enough risk in decumulation can show a negative impact on the retirement outcome. Hence, the objective over this case changes to maximizing the sustainability of the income plan and keep it aligned to the cash flow requirements of the clients.
Measuring the sustainability of the income plan requires modern and advanced tools and modeling techniques, that includes deep analysis on the good, bad and average economic market scenarios, followed by stress test on each of those, and then subjecting the output to the probability of achieving that retirement plan. The same steps are again repeated with different asset allocation option until the optimal point is reached and a multi-asset decumulation portfolio is finally created.
Thus on a concluding note, all of these inputs need to be given equal importance at the core level of the overall financial plan of the clients in their retirement period of income.