The Retirement Conundrum

Series of dominoes stood in a line on a table in front of a light blue background
For financial professionals only

In retirement, investors face two significant risks: longevity risk and sequence risk.

A medium-risk portfolio has a reasonable likelihood of capital growth over the course of retirement, so could help reduce longevity risk -the risk of outliving your savings.

However, the range of potential returns are wide and this introduces sequence risk – the risk of portfolio losses early in retirement that are difficult to recover from.

This chart shows how a medium-risk portfolio in drawdown might perform. The dark green line is the median return and demonstrates the potential for a pot to grow even though regular withdrawals are made, because of the capital growth that higher equity content can deliver.

Increased equity content brings increased risk and a wider range of returns though, and that can mean reasonably high levels of sequence risk. 

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A common approach to reduce sequence risk is to reduce overall portfolio risk. Reducing equities and other risky assets – which can fluctuate widely - tightens the range of potential outcomes. However, as you can see in the graph below, this reduces the growth potential of the portfolio, and that leads to increased longevity risk.

A line graph showing the narrow range of potential returns

This is the retirement conundrum - sequence risk requires a reduction in equity content, but longevity risk requires equity levels to be maintained. And that’s why we need an investment approach specifically designed for retirement investing.

Guardian is a unique solution to support your Centralised Retirement Proposition. It focuses on what’s most important to your clients in retirement: maximising lifetime income success, rather than maximizing portfolio returns.

As you can see below, Guardian aims to reduce the range of potential outcomes without the capital sacrifice associated with a low-risk portfolio.

Please note, this chart does not show real returns and is for illustrative purposes only. 

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Guardian aims to achieve this tightened range by incorporating volatility as an asset class. When falling markets spark heighted volatility, investing in equity volatility can act as a buffer because its value rises as volatility rises.

We believe this solves the retirement conundrum:  a medium-risk approach can be taken to deliver the growth that combats longevity, because the volatility buffer reduces the sequence risk associated with a higher equity allocation.

In rising markets, which are typically accompanied by low volatility, an investment in equity volatility will drag on performance.  Clients can be reassured that any compromise in capital growth potential is balanced by a higher probability of consistent income throughout retirement.

And that’s the beauty of a solution specifically catered to retirement investing, especially when sustainability of income and reduced sequence and longevity risk are your client’s number one aims.

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.  

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