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RUNNING ORDER:
01:02 - Part one: Deconstructing decumulation
07:45 - How to approach decumulation in retirement
13:48 - Top three tips for retirement
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcometo the Investor Download, the podcast
about the themes driving markets andthe economy now and in the future.
I'm your host, David Brett.
(00:23):
We spend most of our working lives growingour wealth and saving for our later years.
But what happens when you need to switchfrom growing during those working years to
spending and maintaining this hard-earnedwealth throughout the
course of retirement?
In this show, I'm joined by Rob Starkey,Portfolio Manager in the Schroder
(00:43):
Investment Solutions team.
We discuss decumulation, what it is,how it works, and how investors might
plan for it before they reach retirement.
On Apple Podcasts,Spotify, or wherever you get your
podcasts, you're listeningto the investor Download.
(01:04):
Rob, welcome to podcast HQ.How are you?
I'm good, thanks.It's good to be here.
Yeah, first time up here?Yeah, first time on the podcast.
Yeah, fantastic.
Okay, well, today we're going to talkabout, Actually, we're going to talk about
something we don't usually talk muchabout, which is retirement, and in
particular, a certain part ofretirement, which is decumulation.
So let's jump straight in.
Can you tell us what youmean by decumulation?
(01:25):
Of course.
Decumulation, in anutshell, is around mindset.
Investors spend their entirelives growing their wealth.
Sometimes that's as long as 40 years thatpeople take building that wealth until
they get to that eventualretirement point.
Now, decumulation is essentially just aninvestment strategy or a financial
(01:47):
planning approachto say, let's change our mindset
from growing your wealthto now spending and maintaining this
hard-earned wealth throughoutthe course of retirement.
Now, we need to separate a financialplan from an investment plan.
A financial plan's componentswould need to be present.
How long do you plan to live for?
(02:09):
Do you want to bequeath any of yourassets to any charity or family members?
Maybe that order might not be what peoplewant to do, but whatever
it is that you want to do.
Financial planners also need to assess thewillingness and ability of
people to accept these risks.
So we're going to takeall of those as given.
But even within that framework, we've gotinvestment risks,
(02:31):
and that's where decumulationor retirement income comes in.
It's not the same asjust growing your wealth.
And in addition to inflation risk,longevity risk, making sure these risks at
the start of your retirementare controlled properly, such
as sequence of returns risk.
It's all around the mindset shift to say,can we have a long, healthy runway
(02:53):
for the rest of your retirement?
Okay, there's a lot tothink about in there.
There's a lot of risk in there as well.
Let's start with the one youjust mentioned at the end.
What do you mean by asequence of returns risk?
Well, a complicated topic,but let's make it simple.
The order in which returns happenmatters in retirement.
Now, people often find this to be asurprise because while you grow your
(03:17):
wealth and accumulate your wealth,generally, you can have these returns
happen in any order, assumingit's from the same pot of numbers.
I'll bring it to life with an example.
We've got a simple three-year returnreturn, 5 % in the first year, 5 % in
the second, and minus 5 % in the third.
If you invest £100,you'll grow to roughly £104.
(03:41):
7 after that period.
If you had to move that negative returnfrom the end to the start
and then grow throughout the three years,you'd end up with
basically the same number.
So while you're growing your wealth, theorder in which you experience those
losses or gains doesn't matter.
But as you start to take money out of yourretirement pot,
(04:04):
if you incur those larger losses towardsthe start of your retirement,
that's the sequence of returnsrisk that we need to manage.
That's the accumulationversus decumulation.
And when a financial planner generallysits down and plugs a number into their
cash flow planning for their investor,you'll use an average.
And the point I'm trying to convey is thatin this world, we need to look past the
(04:27):
averages and this risk, that downsiderisk now needs to be managed.
Yeah.
Markets move in different waysat different times, right?
Exactly.How do you manage that sequence of risk?
Well, I'm going to try and please a lot ofpeople here because it
depends on who you speak to.
If you speak to an actuary, an insurancecompany, a financial planner, or an
(04:49):
investment manager, you'llget different answers.
But before we go down any of these routes,when it comes to financial planning and
investment management associated with it,whether it's an insurance product, an
investment product, or a generalfinancial plan, I like it to be simple.
You're going to have this plan in placefor the next 10, 20, 30, 40 years or plus.
(05:12):
You're going to need toremember what you did.
You're going to need to easily,intuitively or emotionally
attach and trust this process.
And last but not least, you mightnot be some big fancy pension fund.
You might just be an everyday investorthat needs to actually be able to
implement this.
Now, granted, there's lots of options onthe table, but I want simple and easy.
(05:35):
So with that being said,what options do we have?
Well, if you want absolute certainty,you can consider an annuity.
That means you don't need toworry about any downside at all.
If you want to deal with a well-adoptedfinancial planning approach,
you can adopt the bucket approach.
Generally, in a nutshell, that means youtake cash for the first few years,
(05:56):
maybe bonds for the next medium termperiod, and your growth of assets that you
don't have to worryabout for the long term.
It provides the emotional safety that youdon't need to tinker with the assets when
they do go down, likeyou said, the gyrations.
My approach that I tend to prefer, maybewe can get into that a bit of detail
later, is being consistentwith asset allocation.
(06:20):
So we have the same mindset that helpyou grow that wealth into this point.
As an allocation, you still diversifiedacross a whole number of asset classes,
but we slightly tweak what the assetclasses are or want to do,
as well as include new products.
Now, some approachesare more common than the other,
(06:40):
and it depends on what access you have tooperational advantages, what complexity
you want, how much simplicity there is.
But depending on who you are,you might go down one route.
Okay, and just for the people that mightnot know, can you just
explain what an annuity is?
An annuity is essentially an arrangementwhere you take your hard earned pot of
(07:00):
money, you exchange that entire lump sumwith a third party, generally
an insurance company.
And in return, what they will do is theywill guarantee you an income
until the date of your death.
And in some instances, depending on howyou structure it, you can also pass that
on or have a guaranteedperiod for anyone you want.
(07:21):
Essentially, it's a way to remove alluncertainty.
It's the private market equivalentof essentially government pension.
Okay, so a bit of insurance.Exactly.
Get in touch with us by email atschroderspodcasts@schroders.
com or visit our website, schroders.
(07:43):
com/theinvestordownload.
Is there a common approachthat investors take?
In my experience in working with a lot offinancial advisors,
I've seen the bucket approach being theone that's come to the fore most often,
and I see the appeal for it.
It's really easy to follow.
It provides that certainty in thebeginning.
(08:03):
Operationally, all you needto do is to create three pots.
It's quite good from that perspective.
However, just like with anything,including my favourite solution,
there are pitfalls.
The main aim, just to remind you of whatwe're trying to get around,
is that big, large drawdown right at thestart of when you begin taking a pension.
(08:26):
In a world where you have this bucketapproach that needs you to move money from
the market to this cash portion right inone go, you actually increase the risk of
that being a very sensitive time in themarket when assets can be depressed.
So counterintuitively, if you don't planahead, you actually increase your risk.
(08:48):
So what else is on the table?
We've got a situation where over a numberof years in advance, you can begin to
increase that cash pot on the side.
However, where I start to find find a bitof a flaw in that thinking
is in those last few years of retirement.
That's when that compound growth does themost for you and when you want
(09:08):
your money to be invested.
So I'm not quite sold in having a lazyasset on the side a few years in advance.
But bear in mind, if you know the cost ofwhat you're working with,
you can build that into a financial plan,just like if you want to take risk off the
table and invest conservatively,you can factor that in.
But ultimately, there areother routes you can take.
(09:31):
My route, like I mentioned, isthat asset allocation route.
Instead of being as aggressive with growthassets, you slightly shift to more
fixed income, conservative investments.
But even then, the type of investmentsyou buy tweaks a little bit.
And what you're trying to do over here isto bring in what I call a
structured product mindset.
(09:52):
Now, what is that for thelisteners that aren't familiar?
It's essentially an arrangementwhereby you can say, I won't experience
downside or all of itas long as conditions X and Y happen,
the market goes up by 5 or 10 %.
But in return, I'll cap out howmuch money I get on the upside.
So you're essentially taking yourdistributions of outcomes
(10:15):
and you're making it more in line withwhat you want, even if you're
leaving some money on the table.
But there's also annuities, like I said,and I see a place for
this in certain instances.
An annuity can serve for that base.
If you want that guaranteed level ofnon-discretionary spending, regardless of
how wealthy you are, covered for therest of your life, you have an annuity.
(10:40):
The one thing that I find with annuities,though, is that they don't adapt with the
income requirements of a general retiree.
But amongst those, thoseare the main options.
Yeah, I was going tosay about the annuity.
If cost of living goes up, for instance,which we've had over the past few years,
with annuities, you are stuck withwhat you purchased at the start.
Is that the main issue with them?
(11:01):
Exactly.But there are other factors to consider.
You can overcome these.
But beyond having your income adapt toyour lifestyle,
your cash requirements at the start ofyour retirement may not
be the same at the end.
And you can't double up the first fewyears when you've got the health or desire
to spend your money and then back-end it.
(11:22):
You can get very complicated with decidingwhen annuities are going to kick in,
but that's that complexity point.
It's there if you want it.
Another aspect as well is what happenswhen you pass on your wealth?
Can you do that if an unfortunateevent happens with you passing on?
With annuities, you can generally elect tohave somebody receive the income,
(11:47):
but then you get less today,which means there's less of an element of
estate planning that we need to factor in.
So when you consider all of this,you need to trade off your need for
certainty, how healthy you are,and whether there are other more
attractive opportunities onthe table for you to consider.
Yeah, a lot to think about.It is.
(12:08):
So dare I ask what otheroptions are available?
It's a constantly moving target, andthat's why I'm going to be
talking my own book here.
But for the listeners,I've previously been on the advice
side of the fence many years ago.
So I've been in their shoes.
I'm a client myself for financialadvice, so I understand.
(12:32):
But in talking my own book here,you need flexibility that when the market
or the environment shifts, you can adapt.
Imagine a world when annuities are lessattractive when interest
rates are close to zero.
You want to be able tomove on to something else.
If you have a market that is growing quitestrongly on a year to year basis,
(12:53):
that is fundamentally good.
You may make more money there that canreduce some of that
inflation longevity risk.
And then suddenly investing by yourself orthrough a financial adviser becomes more
attractive compared to that guarantee.
But then there's alsoother extra considerations.
If you've got good fundamentals and cheapvaluations with lower interest rates,
(13:17):
compound it up and the choice is yours.
Generally, there's alwayssome truth in the middle.
So maybe you can have a combinationof annuity combined with investments.
But ultimately, you need to be nimbleto factor in these other opportunities.
So all I'm trying to say is thatwhen you invest
(13:37):
in a solutions mindset, you don't justhave to default to that cash approach
because there's more outthere in a given time.
Let's say in a perfect world, inflation ishovering around the ideal target of 2%,
say interest rates settle in around about3%, that's probably where everyone thinks
(13:59):
long term, they might endup in the next few years.
Why not just stick all your cash, take allyour money out, whack it into a high
interest account, earn that gap, whateverthe high interest account might be, 4 or 5
%, and you got 3 % difference between, or2 % difference between that and inflation?
Well, this question hasbeen asked quite a bit.
What I'm not talking abouthere is your emergency funds.
(14:20):
Just like my emergency fund is in cash,liquidly available, I would think
that everyone would want that.
But what I am talking aboutis the long term.
And this is where things get a bit grey.
In the short term, in the scenario you'vementioned, you may have that
guaranteed out performance.
But just from an investment managementperspective, if interest rates come down,
(14:43):
you lose that capital gain andyou get a lower interest rate.
Let's separate that.
Let's just look at some of thestatistics over the long term.
Over a 10-year horizon, the track recordof cash to outperform
inflation is around 60 %.
Now, that number may sound good,but we need to think of by how
(15:03):
much do you outperform inflation?
Because if it's by a tinyfraction, you're right on the edge.
And we need to factor into accountall the other expenses that happen.
You may have financial advisor expense,investment management expense, tax bill.
These things are a drag that comeout of your investment returns.
And after cash, considers theseexpenses, it's way behind inflation.
(15:28):
The only way from an asset perspectivethat's been true to out grow inflation
in the long term is stock markets.
Stock markets over a 20 year period have a100 % history or track record
of growing above inflation.
Now, you don't get that for free.
It's not as conservative as cash, but youget the extra returns to get you there.
(15:49):
When it comes to investing for retirementand decumulation,
we need to make sure that inflation risk,what we call longevity
risk, is well built into it.
Okay, so I guess what we're saying, if youwere to put all your money into a high
interest account, you're banking on thefact that inflation is going to stay at a
certain level and interest rates aregoing to stay at a certain level.
What is the inflation riskand the longevity risk?
(16:12):
As you highlighted earlier, thingsnever stay in a straight line.
These two risks, you needto retirement in one sense.
Inflation risk, every single year, thebuying power of your money gets eroded.
Take a pound 40 years ago, and it couldprobably buy you a a lot
more than it can today.
And that will be the nature ofthe world going forward as well.
(16:34):
Central banks haveinflation targets of 2 %.
Now,for a normal investor that's accumulating
their wealth, you can adapt your lifestyleYou can save more out
of your next paycheck.
Whereas if you're apensioner, you can't do that.
You have a few levers to pull, you candrop your living standard, but you
(16:55):
haven't worked that hard to do that.
You can essentially start to take morefrom your investments,
but then as a percentage, that decreasesyour chances of having money
until the end of your life.
And the game with the financial plan is tohave more money at the end of your life
than more life at the end of your money.
And that's in a very simpleway what longevity risk is.
(17:18):
Living longer than youexpect, outliving your money.
Now, this is whereannuities come into play.
They essentially make sure that youget money until the day that you die.
This is where if you've got a very lowdraw on your asset base,
assuming you're a very wealthy investor,you don't need to worry about it.
If you start by taking one % of your moneyeach year and the stock market halves,
(17:42):
you're still only taking two% of your money each year.
You're leaving enough in there each yearto grow your income above inflation.
Where I'm talking aboutis the investors where all these small
decisions matter,where we really need to make sure that
that downside risk is managed,the inflation outcome is managed by growth
(18:03):
over the long term,and through a good financial plan, we
deliver to financial advisorswhat we promise them
so that longevity risk is managed.
Okay, so we've chatted about a lot.
There's a lot to think about.
If you could try and wrap it up, maybe inthe top three conclusions or something
about what we've just talked about.I know that's quite difficult.
It is a lot.But let's start with the mindset shift.
(18:24):
The tools that got youfrom where you started to where you are
were excellent, and you'veput in the hard work.
Despite that hard work, you needto put on a different hat now.
So we need to expand the toolbox,and a good financial plan will do that.
Secondly, be careful for the risks.
You can't just go out there trying to getthe highest return
(18:47):
because there's these nasty littlesurprises that we want to avoid.
To speak to the Times recently,the so-called carry trade
is one of these examples.
You don't want to incrementally bank ormake that difference between borrowing in
the low currency and investing in thehigher currency,
and then it blows up just like that.
So the way in which you approach riskneeds to change the second point.
(19:12):
And thirdly, you need to beable to trust the process.
In order to do that, you need a processthat can adapt to the environment.
I think that's where a solutionsmindset comes into play.
Great.
I spoke to William Hager a few weeks ago,and we got onto the subject
of pensions and working life.
And I left the conversation a bit of ashivering nervous wreck, but this has
(19:33):
given me a little bit more confidence.I'm glad.
I'm a little bit calmer.That's what we're here for.
Yeah, brilliant.
Rob Starkey, thank youso much for joining us.
Thank you for having me.
That was the show.
We very much hope you enjoyed it.
You can subscribe to the investordownload wherever you get your podcast.
And if you want to get in touch withus, it's Schroderspodcast@schroders.
com.
And you can find out much,much more at schroders.
(19:57):
com/insights.
New shows drop every otherThursday at 05:00 PM UK time.
In the meantime, keep safe and go well.
The value of investments and the incomefrom them may go down as well as up, and
investors may not get back theamounts originally invested.
Past performance is not aguide to future performance.
Information is not an offer, solicitation,or recommendation of any funds, services,
(20:21):
or products, or to adoptany investment strategy.
Welcometo the Investor Download, the podcast
about the themes driving markets andthe economy now and in the future.
I'm your host, David Brett.
(00:23):
We spend most of our working lives growingour wealth and saving for our later years.
But what happens when you need to switchfrom growing during those working years to
spending and maintaining this hard-earnedwealth throughout the
course of retirement?
In this show, I'm joined by Rob Starkey,Portfolio Manager in the Schroder
(00:43):
Investment Solutions team.
We discuss decumulation, what it is,how it works, and how investors might
plan for it before they reach retirement.
On Apple Podcasts,Spotify, or wherever you get your
podcasts, you're listeningto the investor Download.
(01:04):
Rob, welcome to podcast HQ.How are you?
I'm good, thanks.It's good to be here.
Yeah, first time up here?Yeah, first time on the podcast.
Yeah, fantastic.
Okay, well, today we're going to talkabout, Actually, we're going to talk about
something we don't usually talk muchabout, which is retirement, and in
particular, a certain part ofretirement, which is decumulation.
So let's jump straight in.
Can you tell us what youmean by decumulation?
(01:25):
Of course.
Decumulation, in anutshell, is around mindset.
Investors spend their entirelives growing their wealth.
Sometimes that's as long as 40 years thatpeople take building that wealth until
they get to that eventualretirement point.
Now, decumulation is essentially just aninvestment strategy or a financial
(01:47):
planning approachto say, let's change our mindset
from growing your wealthto now spending and maintaining this
hard-earned wealth throughoutthe course of retirement.
Now, we need to separate a financialplan from an investment plan.
A financial plan's componentswould need to be present.
How long do you plan to live for?
(02:09):
Do you want to bequeath any of yourassets to any charity or family members?
Maybe that order might not be what peoplewant to do, but whatever
it is that you want to do.
Financial planners also need to assess thewillingness and ability of
people to accept these risks.
So we're going to takeall of those as given.
But even within that framework, we've gotinvestment risks,
(02:31):
and that's where decumulationor retirement income comes in.
It's not the same asjust growing your wealth.
And in addition to inflation risk,longevity risk, making sure these risks at
the start of your retirementare controlled properly, such
as sequence of returns risk.
It's all around the mindset shift to say,can we have a long, healthy runway
(02:53):
for the rest of your retirement?
Okay, there's a lot tothink about in there.
There's a lot of risk in there as well.
Let's start with the one youjust mentioned at the end.
What do you mean by asequence of returns risk?
Well, a complicated topic,but let's make it simple.
The order in which returns happenmatters in retirement.
Now, people often find this to be asurprise because while you grow your
(03:17):
wealth and accumulate your wealth,generally, you can have these returns
happen in any order, assumingit's from the same pot of numbers.
I'll bring it to life with an example.
We've got a simple three-year returnreturn, 5 % in the first year, 5 % in
the second, and minus 5 % in the third.
If you invest £100,you'll grow to roughly £104.
(03:41):
7 after that period.
If you had to move that negative returnfrom the end to the start
and then grow throughout the three years,you'd end up with
basically the same number.
So while you're growing your wealth, theorder in which you experience those
losses or gains doesn't matter.
But as you start to take money out of yourretirement pot,
(04:04):
if you incur those larger losses towardsthe start of your retirement,
that's the sequence of returnsrisk that we need to manage.
That's the accumulationversus decumulation.
And when a financial planner generallysits down and plugs a number into their
cash flow planning for their investor,you'll use an average.
And the point I'm trying to convey is thatin this world, we need to look past the
(04:27):
averages and this risk, that downsiderisk now needs to be managed.
Yeah.
Markets move in different waysat different times, right?
Exactly.How do you manage that sequence of risk?
Well, I'm going to try and please a lot ofpeople here because it
depends on who you speak to.
If you speak to an actuary, an insurancecompany, a financial planner, or an
(04:49):
investment manager, you'llget different answers.
But before we go down any of these routes,when it comes to financial planning and
investment management associated with it,whether it's an insurance product, an
investment product, or a generalfinancial plan, I like it to be simple.
You're going to have this plan in placefor the next 10, 20, 30, 40 years or plus.
(05:12):
You're going to need toremember what you did.
You're going to need to easily,intuitively or emotionally
attach and trust this process.
And last but not least, you mightnot be some big fancy pension fund.
You might just be an everyday investorthat needs to actually be able to
implement this.
Now, granted, there's lots of options onthe table, but I want simple and easy.
(05:35):
So with that being said,what options do we have?
Well, if you want absolute certainty,you can consider an annuity.
That means you don't need toworry about any downside at all.
If you want to deal with a well-adoptedfinancial planning approach,
you can adopt the bucket approach.
Generally, in a nutshell, that means youtake cash for the first few years,
(05:56):
maybe bonds for the next medium termperiod, and your growth of assets that you
don't have to worryabout for the long term.
It provides the emotional safety that youdon't need to tinker with the assets when
they do go down, likeyou said, the gyrations.
My approach that I tend to prefer, maybewe can get into that a bit of detail
later, is being consistentwith asset allocation.
(06:20):
So we have the same mindset that helpyou grow that wealth into this point.
As an allocation, you still diversifiedacross a whole number of asset classes,
but we slightly tweak what the assetclasses are or want to do,
as well as include new products.
Now, some approachesare more common than the other,
(06:40):
and it depends on what access you have tooperational advantages, what complexity
you want, how much simplicity there is.
But depending on who you are,you might go down one route.
Okay, and just for the people that mightnot know, can you just
explain what an annuity is?
An annuity is essentially an arrangementwhere you take your hard earned pot of
(07:00):
money, you exchange that entire lump sumwith a third party, generally
an insurance company.
And in return, what they will do is theywill guarantee you an income
until the date of your death.
And in some instances, depending on howyou structure it, you can also pass that
on or have a guaranteedperiod for anyone you want.
(07:21):
Essentially, it's a way to remove alluncertainty.
It's the private market equivalentof essentially government pension.
Okay, so a bit of insurance.Exactly.
Get in touch with us by email atschroderspodcasts@schroders.
com or visit our website, schroders.
(07:43):
com/theinvestordownload.
Is there a common approachthat investors take?
In my experience in working with a lot offinancial advisors,
I've seen the bucket approach being theone that's come to the fore most often,
and I see the appeal for it.
It's really easy to follow.
It provides that certainty in thebeginning.
(08:03):
Operationally, all you needto do is to create three pots.
It's quite good from that perspective.
However, just like with anything,including my favourite solution,
there are pitfalls.
The main aim, just to remind you of whatwe're trying to get around,
is that big, large drawdown right at thestart of when you begin taking a pension.
(08:26):
In a world where you have this bucketapproach that needs you to move money from
the market to this cash portion right inone go, you actually increase the risk of
that being a very sensitive time in themarket when assets can be depressed.
So counterintuitively, if you don't planahead, you actually increase your risk.
(08:48):
So what else is on the table?
We've got a situation where over a numberof years in advance, you can begin to
increase that cash pot on the side.
However, where I start to find find a bitof a flaw in that thinking
is in those last few years of retirement.
That's when that compound growth does themost for you and when you want
(09:08):
your money to be invested.
So I'm not quite sold in having a lazyasset on the side a few years in advance.
But bear in mind, if you know the cost ofwhat you're working with,
you can build that into a financial plan,just like if you want to take risk off the
table and invest conservatively,you can factor that in.
But ultimately, there areother routes you can take.
(09:31):
My route, like I mentioned, isthat asset allocation route.
Instead of being as aggressive with growthassets, you slightly shift to more
fixed income, conservative investments.
But even then, the type of investmentsyou buy tweaks a little bit.
And what you're trying to do over here isto bring in what I call a
structured product mindset.
(09:52):
Now, what is that for thelisteners that aren't familiar?
It's essentially an arrangementwhereby you can say, I won't experience
downside or all of itas long as conditions X and Y happen,
the market goes up by 5 or 10 %.
But in return, I'll cap out howmuch money I get on the upside.
So you're essentially taking yourdistributions of outcomes
(10:15):
and you're making it more in line withwhat you want, even if you're
leaving some money on the table.
But there's also annuities, like I said,and I see a place for
this in certain instances.
An annuity can serve for that base.
If you want that guaranteed level ofnon-discretionary spending, regardless of
how wealthy you are, covered for therest of your life, you have an annuity.
(10:40):
The one thing that I find with annuities,though, is that they don't adapt with the
income requirements of a general retiree.
But amongst those, thoseare the main options.
Yeah, I was going tosay about the annuity.
If cost of living goes up, for instance,which we've had over the past few years,
with annuities, you are stuck withwhat you purchased at the start.
Is that the main issue with them?
(11:01):
Exactly.But there are other factors to consider.
You can overcome these.
But beyond having your income adapt toyour lifestyle,
your cash requirements at the start ofyour retirement may not
be the same at the end.
And you can't double up the first fewyears when you've got the health or desire
to spend your money and then back-end it.
(11:22):
You can get very complicated with decidingwhen annuities are going to kick in,
but that's that complexity point.
It's there if you want it.
Another aspect as well is what happenswhen you pass on your wealth?
Can you do that if an unfortunateevent happens with you passing on?
With annuities, you can generally elect tohave somebody receive the income,
(11:47):
but then you get less today,which means there's less of an element of
estate planning that we need to factor in.
So when you consider all of this,you need to trade off your need for
certainty, how healthy you are,and whether there are other more
attractive opportunities onthe table for you to consider.
Yeah, a lot to think about.It is.
(12:08):
So dare I ask what otheroptions are available?
It's a constantly moving target, andthat's why I'm going to be
talking my own book here.
But for the listeners,I've previously been on the advice
side of the fence many years ago.
So I've been in their shoes.
I'm a client myself for financialadvice, so I understand.
(12:32):
But in talking my own book here,you need flexibility that when the market
or the environment shifts, you can adapt.
Imagine a world when annuities are lessattractive when interest
rates are close to zero.
You want to be able tomove on to something else.
If you have a market that is growing quitestrongly on a year to year basis,
(12:53):
that is fundamentally good.
You may make more money there that canreduce some of that
inflation longevity risk.
And then suddenly investing by yourself orthrough a financial adviser becomes more
attractive compared to that guarantee.
But then there's alsoother extra considerations.
If you've got good fundamentals and cheapvaluations with lower interest rates,
(13:17):
compound it up and the choice is yours.
Generally, there's alwayssome truth in the middle.
So maybe you can have a combinationof annuity combined with investments.
But ultimately, you need to be nimbleto factor in these other opportunities.
So all I'm trying to say is thatwhen you invest
(13:37):
in a solutions mindset, you don't justhave to default to that cash approach
because there's more outthere in a given time.
Let's say in a perfect world, inflation ishovering around the ideal target of 2%,
say interest rates settle in around about3%, that's probably where everyone thinks
(13:59):
long term, they might endup in the next few years.
Why not just stick all your cash, take allyour money out, whack it into a high
interest account, earn that gap, whateverthe high interest account might be, 4 or 5
%, and you got 3 % difference between, or2 % difference between that and inflation?
Well, this question hasbeen asked quite a bit.
What I'm not talking abouthere is your emergency funds.
(14:20):
Just like my emergency fund is in cash,liquidly available, I would think
that everyone would want that.
But what I am talking aboutis the long term.
And this is where things get a bit grey.
In the short term, in the scenario you'vementioned, you may have that
guaranteed out performance.
But just from an investment managementperspective, if interest rates come down,
(14:43):
you lose that capital gain andyou get a lower interest rate.
Let's separate that.
Let's just look at some of thestatistics over the long term.
Over a 10-year horizon, the track recordof cash to outperform
inflation is around 60 %.
Now, that number may sound good,but we need to think of by how
(15:03):
much do you outperform inflation?
Because if it's by a tinyfraction, you're right on the edge.
And we need to factor into accountall the other expenses that happen.
You may have financial advisor expense,investment management expense, tax bill.
These things are a drag that comeout of your investment returns.
And after cash, considers theseexpenses, it's way behind inflation.
(15:28):
The only way from an asset perspectivethat's been true to out grow inflation
in the long term is stock markets.
Stock markets over a 20 year period have a100 % history or track record
of growing above inflation.
Now, you don't get that for free.
It's not as conservative as cash, but youget the extra returns to get you there.
(15:49):
When it comes to investing for retirementand decumulation,
we need to make sure that inflation risk,what we call longevity
risk, is well built into it.
Okay, so I guess what we're saying, if youwere to put all your money into a high
interest account, you're banking on thefact that inflation is going to stay at a
certain level and interest rates aregoing to stay at a certain level.
What is the inflation riskand the longevity risk?
(16:12):
As you highlighted earlier, thingsnever stay in a straight line.
These two risks, you needto retirement in one sense.
Inflation risk, every single year, thebuying power of your money gets eroded.
Take a pound 40 years ago, and it couldprobably buy you a a lot
more than it can today.
And that will be the nature ofthe world going forward as well.
(16:34):
Central banks haveinflation targets of 2 %.
Now,for a normal investor that's accumulating
their wealth, you can adapt your lifestyleYou can save more out
of your next paycheck.
Whereas if you're apensioner, you can't do that.
You have a few levers to pull, you candrop your living standard, but you
(16:55):
haven't worked that hard to do that.
You can essentially start to take morefrom your investments,
but then as a percentage, that decreasesyour chances of having money
until the end of your life.
And the game with the financial plan is tohave more money at the end of your life
than more life at the end of your money.
And that's in a very simpleway what longevity risk is.
(17:18):
Living longer than youexpect, outliving your money.
Now, this is whereannuities come into play.
They essentially make sure that youget money until the day that you die.
This is where if you've got a very lowdraw on your asset base,
assuming you're a very wealthy investor,you don't need to worry about it.
If you start by taking one % of your moneyeach year and the stock market halves,
(17:42):
you're still only taking two% of your money each year.
You're leaving enough in there each yearto grow your income above inflation.
Where I'm talking aboutis the investors where all these small
decisions matter,where we really need to make sure that
that downside risk is managed,the inflation outcome is managed by growth
(18:03):
over the long term,and through a good financial plan, we
deliver to financial advisorswhat we promise them
so that longevity risk is managed.
Okay, so we've chatted about a lot.
There's a lot to think about.
If you could try and wrap it up, maybe inthe top three conclusions or something
about what we've just talked about.I know that's quite difficult.
It is a lot.But let's start with the mindset shift.
(18:24):
The tools that got youfrom where you started to where you are
were excellent, and you'veput in the hard work.
Despite that hard work, you needto put on a different hat now.
So we need to expand the toolbox,and a good financial plan will do that.
Secondly, be careful for the risks.
You can't just go out there trying to getthe highest return
(18:47):
because there's these nasty littlesurprises that we want to avoid.
To speak to the Times recently,the so-called carry trade
is one of these examples.
You don't want to incrementally bank ormake that difference between borrowing in
the low currency and investing in thehigher currency,
and then it blows up just like that.
So the way in which you approach riskneeds to change the second point.
(19:12):
And thirdly, you need to beable to trust the process.
In order to do that, you need a processthat can adapt to the environment.
I think that's where a solutionsmindset comes into play.
Great.
I spoke to William Hager a few weeks ago,and we got onto the subject
of pensions and working life.
And I left the conversation a bit of ashivering nervous wreck, but this has
(19:33):
given me a little bit more confidence.I'm glad.
I'm a little bit calmer.That's what we're here for.
Yeah, brilliant.
Rob Starkey, thank youso much for joining us.
Thank you for having me.
That was the show.
We very much hope you enjoyed it.
You can subscribe to the investordownload wherever you get your podcast.
And if you want to get in touch withus, it's Schroderspodcast@schroders.
com.
And you can find out much,much more at schroders.
(19:57):
com/insights.
New shows drop every otherThursday at 05:00 PM UK time.
In the meantime, keep safe and go well.
The value of investments and the incomefrom them may go down as well as up, and
investors may not get back theamounts originally invested.
Past performance is not aguide to future performance.
Information is not an offer, solicitation,or recommendation of any funds, services,
(20:21):
or products, or to adoptany investment strategy.
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