“Another way, of course, to safeguard against sequencing of return risk is to keep some money in a cash account for short-term withdrawals.”
Managing other decumulation risks
While the sequence of returns is perhaps the biggest risk, there are others to be aware of.
Ms Owen suggests that those in decumulation are inevitably exposed to a range of investment risks, although some can be moderated by blending asset classes.
She says: “A number of things need to be taken into consideration – alongside the emotional attitude towards risk – which is the need to take the risk, and the capacity for loss.
“Both of these are important considerations during accumulation years but become, perhaps, more acute when decumulation years are upon us.”
But there are also some risks that cannot be controlled, such as longevity risk for those who could outlive their pension provision.
She continues: "While outgoings typically reduce in the later years of retirement, the fear that one may outlive their pension provision is a pertinent one for many.
“With more and more people walking the tightrope between generating an income and sustaining capital, outsourcing investment and planning decisions to a professional adviser has never been more crucial.”
Keeping worries at bay
Running out of money is probably the biggest worry for most people in drawdown and this can be managed through regular reviews, suggests Mr Simmons.
He adds: “There is also a risk that a client could make an unplanned dip into their fund or that their personal circumstances may change in retirement – for example, as a result of the death of a partner or a divorce. Or they may decide that they want to help a child or grandchild financially for a deposit for a house or university fees.”
He notes it is also important to consider the impact of an increase in inflation, which could potentially erode a client’s income.
Mr Simmons continues: “Being able to identify clients who are or who may become vulnerable and having the appropriate procedures in place should be at the heart of any responsible advice firm.”
He adds: “The benefits of setting up a power of attorney in good time can save clients and their families a lot of time, cost and heartache later in life.”
victoria.ticha@ft.com
