Tim Morris, IFA for Russell & Co Financial Advisers, says the 2017 York study, Decumulation, Sequencing Risk and the Safe Withdrawal Rate, had some interesting conclusions with regard to diversification.
He comments: "Investing heavily in equities may work for many in accumulation, yet perhaps not in decumulation. This is where pound cost ravaging could really have an impact in the not-too-distant future. Just think how those who’ve piled money out of defined benefit (DB) pensions will feel when they see their projected income fall."
His admonitory words about pound-cost-ravaging echoes those of Abraham Okusanya, principal of FinalytiQ, who has warned that "a combination of sequencing risk and volatility drag is exacerbated by portfolio withdrawals, resulting in 'pound cost ravaging'."
For Mr Okusanya, a combination of these three creates a perfect financial storm, which he says "renders deterministic cashflow models meaningless and potentially misleading for clients".
In his 2015 White Paper, Understanding Volatility Drag, Sequencing Risk and Safe Withdrawal Strategy In Retirement Portfolios, Mr Okusanya advocates advisers use Monte Carlo stochastic models and a greater understanding of safe withdrawal rates.
He says: "These enable financial planners to model retirement income options more robustly, demonstrate suitability and deliver better client outcomes in retirement planning."
Sustainability
For Patrick Norwood, insight analyst for Defaqto, advisers need to keep a weather eye on the managers to make sure that the funds chosen for clients are always suitable and sustainable, regardless of whether they are being used for accumulation or decumulation.
He explains: "There is a trade-off in income funds between preserving capital and achieving a high income.
"Therefore, in order to make the fund sustainable, the manager should not aim for too high an income."
"The need for diversification", says Mr Roxborough, "becomes even more important when using a portfolio to provide an income, as your investments now need to provide you with a steady stream of returns rather than big ups and downs, which is precisely what diversification seeks to achieve."
Mr Roxborough strongly advocates making sure the portfolio is diversified enough to minimise the chances of the portfolio losing significant amounts of capital.
"This means clients are less reliant on a single company which may pay an attractive yield but has dividend cover issues, which could prevent it from offering a long-term, sustainable dividend," he adds.
simoney.kyriakou@ft.com
