Pre- and post-retirement solutions Ensuring an income for life

Most clients are aware of the need to save for retirement, but few know where to start. It is up to you, the financial advisor, to put an optimal retirement strategy in place for your clients.

With more and more people surviving to retirement age, and their life expectancy in retirement increasing, the need for appropriate retirement planning is more relevant than ever. It also means that they need to save more and provide for their retirement years for far longer while they are working.

The optimal retirement strategy

Retirement planning needs to happen over a client’s working life. There are many ways in which a client can save for retirement, but the most appropriate product options will differ from client to client. It is important to select the appropriate product option before making the decision on the underlying funds.

It is important to create a portfolio of funds that is aligned to your client’s risk profile and investment time horizon and to select a reputable asset management house.

How much is enough?

How much your client should be saving will depend on his/her requirements at retirement. However, the earlier the contributions begin, the greater the investment value at retirement. This is due to the fact that more contributions can be made, and due to the power of compounding.

Near and at retirement

Five years before a client’s normal retirement date, your client should start transitioning his/her savings into more conservative funds. This requires a more balanced type of portfolio that limits exposure to the riskier asset classes. Again, this will differ from client to client as some clients can still take on risk, even after retirement.

At retirement, you need to discuss all the options available, such as a living annuity or a life annuity. The benefits and disadvantages of each of these types of annuities need to be explained.

Post-retirement strategy

As retirees, clients want to balance safety with the need for growth while maintaining their lifestyles.

For an effective post-retirement strategy, consider the following:

• Manage longevity risk by hedging essential expenses with sources of lifetime income.

• Manage inflation risk by growing the investment portfolio to provide a measure of relief from the impact of inflation. Manage the size and frequency of withdrawals from the fund. Transfer a portion of the fund into a life annuity, thereby increasing their life annuitisation, and minimising the impact of longevity.

• Manage withdrawal risk which may have the impact of lowering discretionary expenses needed in downward markets.

• Manage market risk by making use of a guaranteed income to cover essential expenses. This would remove the urgency and necessity of removing portfolio assets.

• Manage asset allocation risk by ensuring spending towards discretionary expenses is optional. This allows clients to remain with more aggressive asset allocations during market downturns.

It is critical that financial advisors assess clients’ complete retirement savings needs, and needs after retirement, to ensure any retirement strategy is appropriately structured, taking all the above factors into consideration.