For financial professionals only
Most advised clients finish their careers with strong budgeting and cash management skills to take into retirement – combined with a helpful, natural tendency to spend less and less money as they get older.
What this means is that if I start my retirement with a well-founded belief I have £2,500 a month to live on and nothing upsets that view, I will probably manage just fine. But what if I come to see evidence, perhaps over time, that I should have been able to draw more? Or take less risk? That would be a problem.
Governance at stake
Having robust, independent, well-evidenced and up-to-date numbers for the potential growth in a client’s retirement assets sustains the professional standard of advice and supports transparency. One aim of retirement planning governance, in any firm, should be to determine and oversee the growth rates and discount factors used in financial modelling. Assumptions determine the credibility of planning and strengthen its defence.
Why is 2020 different?
For most of the last twenty years I’ve run my own cash flow model at an annual growth rate of 2.8% pa, after inflation and charges. This is on a portfolio of assets which more or less conform to a Risk Grade 6 in the language of our risk framework. In a nutshell, I have around 60% equity exposure. But the trouble with familiarity is that it can lead to complacency and that’s not compatible with sensible management of risk.
So, with the Covid-19 economic shock and the enormous raft of Quantitative Easing which it’s triggered, bond yields have taken a big hit. With the potential for inflation to lift off, my personal planning discount rate has been cut back – to 1.5% pa. I don’t think I’ll make very much at all from the 40% of my retirement assets held in bonds for some time.
In fact, I’m expecting fallout from downgrades and even corporate insolvencies where my managers and trackers have exposure to airlines, hotels, baggage handlers, rental car firms, leisure resorts and cinemas, restaurants, gyms, recruitment consultants, health insurers, oil refining and car part manufacturers. But I know I must stay invested if I want any growth.
What are the actuaries saying?
Actuarial models are, unsurprisingly, more complex than my spreadsheets. They are aware that the numbers need to be thought about as ranges of possible outcomes, based on the best available evidence from today, looking forward. Not from historical case studies.
We offer financial advisers and paraplanners institutional quality modelling, produced by actuaries Hymans Robertson through our Income Manager Tool (IMT), accessible on our platform.
Now, I am hoping to see a 1.5% pa real return over the next 10 years. Hymans Robertson reckon I have about a 25% chance of achieving that. I’m staying optimistic, but anyone who tells me today that a 5% real return is an advisable discount factor for my Risk Grade 6 retirement plan, wouldn’t be asked any further questions.
Hear what the experts think in our next Let’s talk retirement webinar
Thu, Jul 16, 2020 11:00 AM
In episode 4, I’ll be chatting with David McGruther, Actuary and risk modelling consultant at Hymans Robertson and our very own Peter Dalgliesh, Managing Director of PIM.
They’ll give their views on the nature of potential returns after Covid-19, and how stochastic models can help to sustain advice and financial planning in the market context of 2020.
This article is for financial professionals only. Any information contained within is of a general nature and should not be construed as a form of personal recommendation or financial advice. Nor is the information to be considered an offer or solicitation to deal in any financial instrument or to engage in any investment service or activity. Parmenion accepts no duty of care or liability for loss arising from any person acting, or refraining from acting, as a result of any information contained within this article. All investment carries risk. The value of investments, and the income from them, can go down as well as up and investors may get back less than they put in. Past performance is not a reliable indicator of future returns.