A good financial adviser can also help take the emotion out of decisions that have potentially significant consequences.
The costs of not taking financial advice for retirement decisions can be heavy. Research by the Financial Conduct Authority found that savers who did not seek advice were more likely to move their entire pension into cash, for example.
No magical product
The investment-related risks can also be tackled by building and maintaining an appropriate investment strategy. Although there is no magical drawdown investment strategy out there, there are a few key tenets to proper portfolio construction.
Firstly, taking a total return approach that seeks to maximise overall returns through both income and growth, as opposed to focusing on one or the other. Secondly, always being mindful of costs.
This is supported by diversification, which should be at the heart of any well-constructed portfolio.
Diversifying by spreading money across a range of different asset classes plays a big role in mitigating sequence risk and pound-cost ravaging without reducing the total expected return.
Maintaining a properly diversified portfolio reduces the volatility of returns and the impact of falls in one particular asset or market, therefore lowering the impact of poor returns early in retirement.
Rebalancing can be especially valuable for retirement portfolios too, as it helps ensure that income is being taken from assets that have recently done well and not from those that have underperformed and might bounce back in future.
Rebalancing and carrying out regular reviews also ensures the portfolio remains aligned to the investor’s risk profile.
Some investors also seek to mitigate risk by maintaining different pots of cash, such as for the short, medium and long term.
Keeping a small pot of cash available makes sense in the short term, as investors can dip into it in the event of an emergency, rather than raiding their investments.
However, while keeping significant amounts of money in cash rather than growth assets may help reduce sequence risk, it exposes the investor to more inflation risk and lowers expected investment returns, which may ultimately increase the chances of eventually running out of money.
Best of both worlds
Successful drawdown investing invariably means accepting some of the risks that come with remaining invested during retirement. There is no way around that, it is part and parcel of the risk/reward trade-off.
That is where the experts come into play. Financial advisers and planners have a vital role to play in helping investors navigate the decumulation landscape, not least when circumstances or market conditions change.
Advisers also help shape the investment strategy that is key to mitigating decumulation risks and making drawdown work.
