FOR UK FINANCIAL ADVISERS
Sustainable withdrawal income: The problem of underestimating an ‘expiry date’
05 Aug 2020
Benjamin Franklin famously said: "In this world nothing can be said to be certain, except death and taxes." While conversations about the latter are standard practice for financial advisers, when it comes to death, discussions can often be slightly trickier – let’s face it, none of us like to spend too much time thinking about our own expiry date!
I recently hosted a webinar which focused on overcoming the challenges of decumulation from a financial adviser’s perspective. I was joined on the webinar by Rob Tinsley, Financial Planner from Chantler Kent investments, where we discussed the various challenges faced by financial advisers when it comes to building a decumulation solution. One of the points that struck me most in our discussion was the importance of better pin-pointing a person’s life expectancy to enable a robust sustainable withdrawal income plan to be developed.
While a conversation about life expectancy can be difficult in the first place, when they do happen, all too often individuals don’t appreciate their own life expectancy. Clients tend to either make longevity predictions based on their own family’s health history, rather than on current industry evidence, or rely too much on “averages” which bear no relation to their own circumstances. The result is that clients can get the prediction all wrong which is bad news for effective decumulation planning. Unfortunately, it seems that underestimating life expectancy has become the norm, recent research by Scottish Widows found that the average UK adult underestimates their own life expectancy by 5 years.
Currently, we still see plenty of retirees who are in the luxurious position of being able to rely on the security of a fixed final salary pension and can top-up their income by drawing down from an additional pot(s) of savings. However, as the number of people with DB provision gradually tails off, more individuals will become reliant on drawdown to fund their retirement, for these people, a better understanding of their life expectancy becomes a fundamental aspect of their financial planning process.
Fortunately, there are tools available that can help tackle this longevity risk issue. These tools can help start a more informed conversation about longevity with clients and shape more sustainable withdrawal rates. If you would like to see a demo of our own Sustainable Income Tool, please get in touch.