Adviser firms should have a consistent and planned approach to retirement planning but risks and client outcomes will vary.
One of the more intelligent remarks during an adviser roundtable I hosted recently for Platforum – on the subject of decumulation in retirement – was the following: “I encourage many of my clients to turn left on the airplane when they go on holiday.”
This adviser’s advice to clients was to travel by air, either business or first class – and spend more on holidays generally. Many of her clients were not spending as much as they could safely afford. Others concurred and it was an evening packed with good insights and sensible observations – as these events almost invariably are.
The adviser went on to explain what she really meant: essentially it is her job to make sure that clients made the most of their money. In many cases, that clearly means clients spending more than they previously thought they could safely do. This wasn’t a reckless recommendation to ‘spend, spend, spend’ but a clear view that she should help her clients enjoy what they had accumulated and spend more where they could afford to do so.
This is consistent with the findings of the Institute of Fiscal Studies’ recent report that the ‘majority of financial wealth among those currently retired is set to be bequeathed rather than used to finance retirement spending.’ The IFS says this seems to be true for almost all levels of income and wealth.
Even the risk of having to spend mammoth sums on end-of-life healthcare seems to be overestimated: ‘Only a small minority of people pay out-of-pocket medical costs, a minority report assistance with daily activities from a privately paid employee and 7 per cent spent more than six months in a nursing or residential home.’ This is a good deal less than other commentators have reported; but even if the chances are nearer 4:1 than the IFS 14:1 view, it is a risk for a minority.
Of course, many clients need to be very careful and rein back expenditure to make sure they don’t run out of funds given the very real danger that they would probably live a good deal longer than their parents had. And that’s the point with retirement planning: there are so many possible risks and outcomes. Some need to economise; others could choose to spend more. So, a good starting point is to help the client make the most of their money – whatever that might turn out to be.
The problem with financial planning for old age is that everyone is more or less on their own when it comes to managing all the risks. Running out of money is the big risk and it can happen for lots of reasons.
Risk 1: Investment returns can fail to match normal spending needs. You can mitigate that for clients by using cashflow forecasting to test reasonable assumptions about investment returns and spending needs and provide some early warning of the need to take early action. You can also suggest clients should adjust their spending patterns and investment strategies.
Risk 2: People can live too long. You can mitigate that by being realistic about the risks of living far longer than the average. I was told I have a 1 per cent chance of making it to age 109 years. Only slightly delusional, I am still debating with myself whether I should run the cashflow forecast to only age 105.
Risk 3: If a client is depending on working long after retirement age they could lose their job for sickness, incompetence or bad luck. Employment rates among the over 65s have leapt in recent years according to the FCA. In 2004, 9 per cent of men over 65 were working and by 2016 it was 14 per cent. Women over 65 increased their participation in the work market from 4 per cent in 2014 to 6 per cent in 2016.
Risk 4: A client could be faced with having to pay a thumping great bill at some point. The biggest one is likely to be for care and that’s likely to come at the end of life. Some people aim to land up dependent on the State for their care bills, but that doesn’t sound like a formula for a happy and secure old age.
So, most clients use their homes or defined contribution pensions as their reserves for care costs or other contingencies, otherwise these assets are passed down. It is right to take this kind of precautionary approach, but also use their money to enjoy their retirement.
Advisers need to discuss all these risks with clients and in many cases, a few more as well – the risk of divorce or relationship break-up, for example. Rates of these events for older couples are on the rise as retirement can put too much strain on some relationships. Just discussing investment risk seems so inadequate, however essential.
Planning for retirement can be a complicated undertaking, so it makes sense for adviser firms to try and make the process consistent and planned rather than making up as you go along. That’s increasingly known as having a centralised retirement proposition – and one thing it does not mean is uniformity of outcomes.
Danby Bloch is chairman of Helm Godfrey and consultant at Platforum