Katie Roberts, Global Head of Client Solutions, Fidelity International
Longer lifespans have increased the risk of individuals outliving their savings. At the same time, they are carrying more of the financial burden of both saving and investing for retirement. To reduce the risk of running out of money during retirement, there are essentially four options: spend less; save more; increase investment returns; or work longer.
In the following, Katie Roberts, Fidelity’s Global Head of Client Solutions, discusses the two options involving saving more and investing to optimise retirement assets. Given the complexity, we believe the way you accumulate retirement assets shapes the options during the drawdown stage in what’s known as decumulation, and vice versa. Therefore, Katie addresses three key questions asked by clients, showing how longevity risk is intertwined during the two stages of accumulation and decumulation.
How much should I be saving?
During working life, many people might set a target for their retirement portfolio, such as a million euros. However, longevity risk shows why this might be a flawed approach. What if inflation, market movements or low interest rates at the time of retirement (or during retirement) does not provide the expected monthly income for retirement?
The two central questions should be: how to save given the longevity risks; and how should the portfolio be drawn down in retirement. The issue is the income that the investment portfolio can provide for a lifetime. Framing retirement savings in this way connects accumulation and decumulation.
How can I invest for retirement when there are so many uncertainties?
Maximising the options you have when you retire is immensely valuable. The larger the retirement pot, the more freedom you have to choose, whether it be to work or not to work, to invest in healthcare, or to support your children and grandchildren.
This is why we believe the choices you make to save and invest retirement assets should give you the most options during pension drawdown. And you need to think about these things early. If you wait until you are near retirement, that is too late and many of your options may no longer be available. Retirement also requires confronting trade-offs, for example, compromising by leaving a smaller inheritance in exchange for greater financial flexibility elsewhere. The precise goals may be unknowable today, but the need for financial resources will not be.
How should my investment strategy during the accumulation stage reflect decumulation risks?
Most people are aware that saving for retirement calls for a diversified portfolio that includes growth assets such as stocks, property and higher-yielding bonds. Pension drawdown, in contrast, comes with a different set of risks that are not as well known. For example, one distinction is that withdrawals during market downturns can be devastating, so you need to mitigate that risk. Equally, withdrawals do not need to be a fixed amount throughout retirement. Spending typically peaks early as travel and leisure dominates and may decline later in life.
The glide path to retirement cannot be based only on age. It must be linked to factors such as spending needs, health risks and family responsibilities. If paying off a mortgage is a priority, then retirement savings should include assets that can be liquidated flexibly. If legacy is a concern, then savings should include illiquid, longer-term assets that deliver capital growth. Effective planning therefore requires flexibility, maximising the pot size as early as possible. Once you get closer to retirement, start to think about withdrawals, taking into account factors such as market conditions and lifestyle.
Read the full report
