Sequencing risk – helping clients to ‘get it’ using cashflow planning

, 4 September 2020

Over recent years, the definition of the word retirement has evolved massively and rightly so. Retirement should be a celebration of working life and the opportunity to tackle the ‘bucket list’.

Clients should be encouraged to focus on their lifetime plan and what they want to achieve over the next phase of their life.

When people retire today, they don’t necessarily want a reduced lifestyle and it is the adviser’s job to provide them with the visualisation and knowledge to make informed decisions. Many clients are as ambitious in retirement as they were in the workforce, with their sights set on retirement. The only difference now is they have the time to focus and fulfil their dreams.

It is crucial however that this is an engaging and interactive discussion to ensure they have the peace of mind that they can do this.

Will your clients run out of money?

Retirement is a huge milestone in a person’s life, financially and emotionally. Advisers are on hand to guide a client through that journey. You will be regularly seeing clients who are ready to retire and have discussed the many options available to them.

At the time you considered all the options and modelled these scenarios in a cashflow projection. FAD looked like the winner and you recommended a regular withdrawal via FAD which was on track to provide a sustainable return for your client’s lifetime.

Cashflow graph

Brilliant. On to the next client. Job done, right?

No doubt you considered (and included some risk warnings about) the income not being guaranteed and how markets can go down as well as up. However, you needed skills beyond any other financial adviser to predict a global pandemic crashing the markets in 2020. We talk more about this in a previous blog ‘Perfect Storm’ here.

Sequencing risk is a very big problem for those reliant on their savings for income. Sequencing risk, or ‘pound cost ravaging’, is the risk posed by the timing of unfavourable returns when taking withdrawals from an investment.

The consequences of unfavourable returns are significant at the point of retirement. Poor returns in early years can really impact savings, in comparison to equivalent poor returns later on in retirement.

The below graph gives an example of one possible outcome following a period of poor returns 15 years into retirement

Cashflow planning graph

The next graph shows the same poor returns but in the first year of retirement.

cashflow graph

This shows the importance of reviewing your client’s drawdown income with them regularly and considering whether any adjustments need to be made.

It’s not all doom and gloom!

Most clients assume they need to reduce spending in retirement when this simply isn’t the case. They could afford to buy that house in France or have that holiday of a lifetime. Many have flexibility in their spending power and can even spend more. It is the adviser’s job to show them they can afford to enjoy it and using cashflow is an ideal way to do this. The below example shows the client could potentially make a one-off purchase of £145,000 and still achieve their retirement goals.

Technology should be in place to help, not hinder processes. It should be easy to use but give you the features to undertake true financial planning, demonstrating all aspects of value. i4C is designed by financial planners, for financial planners to ensure an engaging and interactive client and user experience.

At IPS we are experienced at reviewing all possible income solutions. We can do the hard work for you, leaving you to spend more time to reassure your clients and provide sound financial advice.

If you are an IFA and require Paraplanning assistance don’t hesitate to get in touch: Email portal@integratedparaplanning.co.uk or Phone 0117 2050 343.

This was written by our guest blog writer: Suzanna Pajak APFS, Managing Director and Outsourced Paraplanner at Integrated Paraplanning Solutions