With the FTSE 100 index recently hitting an all-time high, some commentators have suggested the market is over-valued and ripe for a fall.
Just because the index is riding high, it doesn’t mean a correction is around the corner.
However, with the market already slipping back from its peak, retirees in drawdown could be left unnerved. So how can advisers protect client income during a stockmarket fall?
Since the introduction of the pension freedoms in 2015, markets have been relatively buoyant and clients in flexi-access drawdown have so far enjoyed a smooth ride.
Yet when markets do become more turbulent, this may not be the case.
A recent report by Zurich – Drawdown: Is it working for consumers? – revealed that two in five (41 per cent) people in drawdown have not received financial advice or guidance, so it is little surprise that a further two in five, or 41 per cent, are failing to adjust their pension income levels to account for fluctuations in the stockmarket.
If the bottom does drop out of the market, hundreds of thousands of people could be in for a sharp fall.
However, by taking steps before and during a market correction, advisers can help shield clients from the worst of it.
Firstly, help clients understand the impact on them given different scenarios.
Cash flow modelling can give clients additional understanding of associated risks.
Clients need to reflect on how much income they require from their savings and what they actually want to do in retirement. But running different scenarios showing the good, the bad, and the ugly of market returns provides clients with a more realistic appreciation of how the ups and downs of the market could impact their retirement.
When markets are volatile, clients are already prepared for what it could mean for them.
Diversify, diversify, diversify
Encourage diversification so as not to stretch income in the first place.
Diversification is essential to protecting a client’s assets in a market crash.
As ever, picking a portfolio of non-correlated investments, diversified by geographical region, asset class (equities, bonds, etc.) and sector, can help create greater stability of returns over the longer term, reducing a portfolio’s overall volatility.
Of course, that is over the longer period and very different when immediate and ongoing income is required.
Cash buffer
Clients should have a safety net of cash in order to safeguard current income levels.
Building up a cash buffer can protect against falling stockmarkets. If the worst happens, and the stockmarket crashes, then having a reserve of cash gives clients an income to fall back on.
Holding one to two years' worth of cash means clients won’t be forced to sell when prices are falling, thereby locking in losses.
