The problem, says David Coombs, head of multi-asset investments at Rathbones, is that for the typical client retirement now lasts much longer.
Historically, if an adviser was presented with a client approaching retirement at the age of 60, the period in which they are in decumulaion could plausibly be 15 years, and the asset mix in the portfolio can be created with this in mind.
But a client entering the decumulation phase today may be doing so with a 30 rather than 10 or 15-year time horizon.
This could mean a portfolio that needs to produce some growth alongside the usual income, impacting the asset allocation mix.
Coombs says: “The old notion of transferring more into bonds as you get closer to retirement is probably out of date now. I actually think that now it’s inappropriate to have a rule of thumb, it will increasingly depend on the individual, and obviously the adviser is crucial to that conversation.
“But I think in general, clients will need to have more in equities, and we could be at the stage where for some clients there is a need to treat retirement as part of the accumulation phase.
“And from an income point of view, because the pot of assets is to be owned for longer, inflation considerations come into it much more. You need to think about protecting the spending power of the income generated to protect the current lifestyle.”
Alex Funk, chief investment officer at Schroders Investment Solutions, says: “On the income portfolios we have here, on some of them the target income yield might be 5 per cent but it is certainly the case that you have to monitor the capital side now much more so than in the past. It can’t just be take the income and deplete the size of the pot any more.”
He adds that even within equities there is an increased need to diversify. Funk says that a portfolio constructed solely with retirement income in mind would likely be very exposed to companies that pay a very high dividend, but perhaps have relatively low growth prospects.
In a portfolio where capital appreciation from equities is also necessary, this is likely to mean that retirement portfolios in future have exposure to a wider range of equities and investment styles, such as having both growth and value equities, whereas in the past a client in decumulation would be expected to have very little exposure to growth stocks, Funk says.
Inflation
The challenge is that higher inflation increases the level of income needed to maintain one’s lifestyle, while also eroding the capital value of the pot in retirement.
Obviously the longer the timeframe in which the client is in decumulation, the greater the risk that the assets in the retirement pot will be eroded by rising prices by the time the client comes to draw some of the income for retirement spending.
