Managing risks and dealing with uncertainty for clients in retirement puts the onus on planners to present clients with probabilities and options, not straight-line return forecasts.
Consultant Paul Maddock, who has previously worked with MLC, BT and SFG, says the planning process should start with a detailed discussion between the planner and the adviser on how much the client wants to spend in retirement. Then it’s a question of matching up that requirement to the capital the client has accumulated, and determining the probability of the capital being sufficient to fund that level of spending for the expected retirement period.
That’s where stochastic modelling comes into it. Instead of assuming, say, a 7 per cent a year return from a portfolio with a given asset allocation, stochastic modelling involves simulating thousands of possible investment outcomes for that portfolio.
Maddock and Doug McBirnie, a consulting actuary with Accurium, will present the opening session of Day 2 of the Conexus Financial Post Retirement Conference on March 11 , focusing on “When does post retirement actually start”, in which they will present the findings of research conducted based on the actual asset allocations of self-managed superannuation funds.
Assign probabilities
In some simulations the capital will easily fund the spending required; in others it will fall short. But the number of simulations means an adviser can start to assign probabilities to the portfolio doing what the client wants.
If the client is comfortable with that probability, then fine. But if not, then either the client’s spending expectations have to be managed down, or a greater capital sum is required. That might mean continuing to accumulate assets and delaying retirement.
“But this is something that until people get quite close to retirement, they never actually sit down and do; and in fact for many couples it’s a very challenging discussion with a financial planner about what do you want the next 20 or 30 years of your life to look like and what are your goals?” Maddock says.
“That’s what it gets down to, and being very clear about what the spend, not the income…is going to be needed to actually do that.
“And the next step is an expectation-management exercise, because it’s a question of well, all right, do you want to spend, let’s say…the ASFA [Association of Superannuation Funds of Australia] ‘comfortable’ [retirement]-index quoted amount, which is around $58,000. If you want that, what sort of capital sum do you need to support it?
What level of confidence?
“Then it’s a real question of stochastic modelling, in terms of what level of confidence you can have for that spend of $58,000 – what sort of capital sum you’re going to need, assuming an average asset allocation.”
“That gets down to your risk profile,” he says.
“[If a client says] ‘I want an absolute 100 per cent guarantee’ – well okay, but that’s going to cost a lot more than an 80 per cent statistically probable expectation,” Maddock says.
“And that’s the job of the planner, to go through that whole exercise of getting the aspirations on the table; what’s needed for that; can you afford it; and then okay, let’s look at probabilities.”
Maddock says the key to good advice lies in “explaining risk to clients in a way that they can understand [while] not compromising on the information”.
“For example, in this stochastic modelling of outcomes, the thousand scenarios that underpin that are a lot for a client to understand, and the challenge for the adviser is to say, ‘I’ve done this work and this gives me this level of confidence your portfolio will do that’,” he says.
Designed for advisers
Day 2 of the Post Retirement Conference – produced by Conexus Financial, the publisher of Professional Planner – is designed for financial planners and advisers, and covers topics ranging from the issue of when “post retirement” actually starts for most clients; legislative and policy developments in Australia and overseas; product design and evolution; goals setting and portfolio construction; estate planning; and how to help clients deal with the “retirement blues”.
It features a line-up of first-class speakers and panelists, including: Macquarie Bank executive director David Shirlow; chief investment officer of the investment solutions group of State Street Global Advisors Dan Farley; Milliman senior consultant Craig McCulloch; Innova Asset Management co-chief investment officer Dan Miles; Colonial First State general manager of advocacy and retirement Nicolette Rubinsztein; EY partner Steve Nagle; Equity Trustees national manager of estate planning Anna Hacker; lawyer and Your Estate Plan principal Bryan Mitchell; Strategy Steps director Louise Biti; My Longevity director David Williams; Prova director of psychological services Steve Smith; executive coach and clinical psychologist Tim Sharp; Challenger chief executive of distribution, product and marketing Paul Rogan; and CFS general manager of product Peter Chun.
The Post Retirement Conference has been accredited for 6.5 CPD points by the Financial Planning Association of Australia (FPA)*. Full details, including the agenda are available at the event website.
* This activity has been accredited for continuing professional development points by the Financial Planning Association of Australia but does not constitute FPA’s endorsement of the activity. Accreditation number 007097 for 6.5 points
