Decumulation – The Usual Suspects

Have I got enough money to live on in the lifestyle that I want?

Probably the most often asked or at least thought about financial question of our age. Perhaps this isn’t surprising since so many of us now rely on building up a pot of money to live off when we stop or reduce our time spent working.

In the past, those working for large employers might have relied on the work’s pension scheme which would promise a pension for life after retirement. That provision has diminished at the same time the demographic bulge of the baby boomers has reached retirement age. If that wasn’t enough this market has been given a turbo boost through Pensions Freedoms of 2015.

Not surprisingly we have seen an increasing focus on the needs of clients in this situation. Much of the debate and discussion has focused on understanding the risks in managing a pot in retirement – the decumulation phase. We will look at a recap of these risks but we need to move the conversation on to what we do about these risks.

 

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Our list of the usual decumulation suspects:

Suspect 1: Drawdown i.e. a significant fall in markets

This suspect is not habitual in his movements and therefore unpredictable. When he

does strike it can be significant and able to cause a lot of damage to financial plans

and to client confidence.

 

Suspect 2: Volatility drag

Our second suspect is a cousin of suspect 1 and her work is somewhat more subtle.

We know she is at large from statistical analysis but is rarely glimpsed. However her

effects are insidious and persistent.

 

Suspect 3: Sequencing risk

The notoriety of ‘The Sequencer’ has increased considerably over recent years.

Commentators and the FCA have observed the ill effects of his work. Efforts to

contain him have improved but they have so far been patchy in their success rate.

 

Suspect 4: Pound cost ravaging

The bad half of the family. The pound cost averager has been a friend to many over

the year. Not so ‘The Ravager’ who works in opposition and does her work just at

the worst time and her crimes have been highlighted and commented on by many.

As markets fall more units are sold to match the income required.

 

Suspect 5: Inflation risk

Perhaps the most infamous of our suspects she has a long track record of damaging

clients’ wealth in the long run. Despite our better understanding we need to

maintain our vigilance to avoid the pain she can cause.

 

Suspect 6: Longevity risk

Our last suspect is a perhaps the only one we welcome. The result of suspect 6’s

work is that on average we will live longer than our forebears. The benefits of this

on our lives comes with a price for investors.

 

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