By Darren Burns, Head of Investment Solutions
COMING SOON – The Glacier Invest team has developed a progressive new approach to living annuity portfolio construction. We will shortly be announcing the launch of the Glacier Invest Living Annuity Income Solutions. In the meantime, here is some background to what led us to develop this new approach.
In uncertain times, you want to know that your retirement income is secure, but at the same time you may be needing your capital to keep growing – especially if you foresee a long and healthy retirement.
While living annuities offer income flexibility and the potential for market growth, they do place the onus on investors and their financial advisers to ensure that the inherent risks are taken care of and mitigated.
Risk, what risk?
Aside from investment risk, the two main risks that retirees face are longevity risk and sequence risk.
Longevity Risk
This is the risk that an investor, who is drawing down from their savings, outlives their capital.
There are a number of reasons why investors face longevity risk. These include insufficient savings, less-than-anticipated investment performance and underestimating life expectancy. This leaves investors with a large amount of uncertainty in planning for retirement, due to events and circumstances out of their control.
Of the three reasons mentioned above, saving enough – and preserving retirement savings when changing jobs – is the only factor that investors really have control over.
The low-return environment we’ve experienced over the past few years, coupled with the ever-advancing medical field and generally healthier lifestyles, has meant that the financial future is very uncertain for a large number of investors.
In short, the traditional way of thinking about investing to produce a retirement income does not apply today.
Sequence Risk
This is the risk that the timing of withdrawals from retirement savings will have a negative impact on the overall effective rate of return.
Underperformance in the early stages of retirement can have catastrophic long-term effects on the portfolio value of an investor. Should this occur there is very little chance that an investor’s portfolio will ever recover, and all assumptions entered into prior to retirement will have to be readdressed. This again introduces a large amount of uncertainty.
The difference between being able to maintain your standard of living in retirement versus having to make significant sacrifices to your standard of living is therefore highly dependent on how the market performs over a short period of time. Again, this is something that is largely out of your control.
How are we addressing these risks?
Many of the underlying causes mentioned apply equally to both Longevity and Sequencing risk. These are some of the issues the Glacier Invest team identified and that needed to be addressed in finding a solution:
- Uncertainty and lack of control over market performance is one of the biggest causes behind both of these risks – what is needed is a solution that provides a high level of certainty of investment performance.
- Risk (volatility) is the primary cause of Sequence risk – what is needed is a solution that aims to decrease volatility while still maintaining the same level of income.
- In summary – retirees need a solution that provides more consistent returns that are still in line with the required level of income while at the same time reducing volatility and minimising overall drawdown.
The ever-evolving economic and market landscapes has also led to the advancement and expansion of available investment products. Historically, the more complex investment tools have only been available to select investors in very specific product sets. However, it is now possible to use unique asset classes and tools (such as hedge funds, smoothing funds and alternative investments) more broadly, in order to achieve the above three objectives.
