Sustainable withdrawal rates (SWR) have become a core advice issue for advisers with retirement clients, following the shift from annuities to drawdown.
There are many methods for articulating what the SWR rate could be, but how is this evidenced when everyone’s needs are different?
Decumulation requires a different strategy to accumulation. Ironically, in this age of pension freedoms, sustainable income requires controls in place. Many advisers are considering a Centralised Retirement Proposition (CRP) for this purpose.
A CRP could be described as a de-risked decumulation strategy, deploying measures to articulate and evidence the moving parts of a sustainable withdrawal rate.
Every client will have their own requirements, savings, liabilities, and views on what risks are acceptable. It will be different for everyone, and so everyone will have their own SWRs.
There are two elements to defining sustainable withdrawal rates:
1. Define income split between essential and discretionary spending.
2. Understand and establish the ‘controls’. There are several moving parts that define the SWR for each income stream.
Once budget planning is carried out, the next stage is to consider the ‘controls’ for each income stream:
Time Horizon – How long is the income needed for?
Inflation assumptions – Level or CPI/RPI linked
Portfolio asset allocation – This considers the degree of equity exposure that is supporting the income stream.
Fees and Charges – Impact of platform fees, fund charges and adviser fees.
Probability of success – Defines the desired probability of successful outcome for each income stream.
If we imagine these controls as dials, and set them in different positions, we get different SWR figures aligned to the respective income streams.
The final step is to calculate the capital to support the income levels needed at the defined sustainable withdrawal rates.
Evidencing a Sustainable Withdrawal Rate is just one part of managing a client’s retirement funds. Developing a de-risked decumulation strategy that’s robust and repeatable is worth considering as there could well be a tsunami of retirement clients just waiting to switch income on. This is heading our way, and advisers need to be ready.
Tony Clark, Proposition Marketing Manager, Just
Read our new think report De-risking-decumulation to help clients descend safely