Retirement is a journey not an event – questions and answers
Pension freedoms not only introduced more choice at retirement, it has also brought a number of retirement planning concepts into the open. Issues such as; ‘retirement is a journey not an event’, ‘sequence of returns risk’ and ‘sustainable levels of income’ have always been important but now pension drawdown is becoming the new fault at retirement these issues should now be part of the everyday discussions about retirement income.
Looking under the bonnet
In the past, it was probably only those specialising in retirement income planning who needed to lift the bonnet and look inside at the mechanics of drawdown and understand how all the moving parts fitted together. Today, all advisers need to become drawdown mechanics as drawdown replaces annuities as the most popular choice for those with modest sized pension pots.
In my latest guide ‘Retirement is a journey not an event – questions and answers’, sponsored by Prudential, I have converted some of the theory of retirement planning into practice in the hope this will help non-specialist advisers gain a better understanding of the retirement journey and equip them with the ‘tools of the trade’ so they can provide better quality advice.
The retirement journey can be long and unpredictable so it helps to plan ahead. In fact, there is general agreement that one of the most important aspects of financial advice is helping clients plan ahead for their retirement. This requires advisers to have both the technical knowledge about a wide range of subjects as well as the behavioural skills to guide clients along the journey as their objectives and attitude to risk will probably change.
Specialist retirement planners will probably use a cash flow modelling tool to plan future income requirements but this technique may not be appropriate for clients with modest pensions pots who do not recognise the importance of detailed planning. A good technique for these clients is to break the retirement journey into bite sized chunks and to discuss how to move form stage to stage.
Four stages of retirement
In my guide, I have broken the retirement journey into four stages: before retirement, at retirement, during retirement and later retirement. I make the important point that although each stage can be viewed in isolation, one of the value adding parts of advice is to plan for the next stage before it happens and help clients transition through the different stages.
This approach has a number of practical applications. For instance, how can we advise on a pre-retirement strategy without having some idea what options will be taken at retirement? Or how can we recommend an appropriate investment strategy for drawdown unless we are clear about the future objectives.
One of the future challenges for retirement advisers is how to incorporate the family home into the retirement income plan. My approach is to view the home as being like the Bank of England; lender of last resort. There are very good reasons for not taking advantage of equity of release until the time is right, but having the knowledge that this may be a sensible option in later retirement may help with some of the mid retirement planning.