Retirement Planning

Here, as in perhaps no other area of Wealth Management is each and every client truly unique. Here we also believe no one can be a master of all aspects of retirement planning. For each element of a particular solution, a different specialist provider may be involved.

There are essentially two groups of people when considering retirement planning;

1. The Affluent; for whom ensuring a certain given standard of living in retirement is of primary importance. In fact, it’s probably the most important, complex set of decisions an individual heading toward retirement has to make. It is closely tied to insurance solutions. 

2. The Wealthy; A certain standard of living, or consumption is a given. It is not a concern. Retirement planning is about tax management, succession planning, insurance, asset protection, estate planning and so forth. Retirement planning for the seriously wealthy is an issue, but determination of projected standard of living is not. When working with the wealthy, we focus on the goals and objectives of the client as he or she is heading toward retirement or perhaps into philanthropic work. 

Retirement planning for the affluent

We take the view that Wealth Managers must work with banks and insurance companies to tailor investment products that offer downside protection in exchange for limiting upside benefit or gains. 

In effect, the client is demonstrating that they are loss-averse (not necessarily risk averse, something else again). Pension policy experts are proposing that for employer-sponsored pension plans, the default withdrawal should be an annuity of some kind. Whether this makes sense against a lump-sum payout is another matter. The role of the financial planner is to bring it all together, coordinating with career counselors as routinely as with the client’s lawyer, accountant, banker and insurance agent. 

Pension planning is changing fast, the implications for private wealth managers are far reaching and will include the following:

  • Arranging inflation-protected lifelong income instead of maximising portfolio return becomes the central issue
  • The idea that time softens the risk of stock investing is recognised as wrong or a misrepresentation of the true state of affairs
  • Clients need to be brought up to date on the changing norms for best practices
  • New products will enter the marketplace (inflation linked structured products)
  • The ongoing shift in theoretical models will promote accurate evaluation of new products
  • Target date, or life-cycle funds, that place investment risk squarely on the consumer will seem just plain wrong
  • Tax rules for retirement plan mandatory withdrawals and eligible assets will have to be updated, as will prudent investor legal standards for fiduciaries
  • Career asset management will become a standard subspecialty field
  • Best practices will include gradual partial annuitisation with inflation-indexed annuities;
    • potentially bundled with long-term care insurance and/or longevity insurance;
    • along with complementing equity exposure with bounded risk and return features - Equity Indexed Annuities and derivates therof 
  • Consumers will move toward insurance-based investment products and will exert increasing pressure for transparent pricing through competitive distribution channels
  • Practice models, especially those based on fees calculated as a percentage of assets under management will need updating

Practical Implications 

There are two main practical implications of all this;

  1. The notion that stocks are safe in the long run is WRONG

  2. The appropriate benchmark for retirement planning is the inflation rate (CPI) of the currency you get the bulk of your bills in, not some market index (SMI, DAX, S&P, Nasdaq, STOXX, etc.)  

A useful starter and a reflection of our philosophy is the table below contrasting the messages we receive from popular literature and the investment industry vs. financial economic reality.  

We can find arguments in favour of both. We are great believers in equity investing and diversification for example. We do however recognise that human beings (including us) tend to drastically misjudge risk and that when planning for retirement or other major goals in life, a more rigorous approach needs to be taken to avoid potential disasters, eg., 1929 Wall Street crash and great depression, 1973 Tech and Stock market crash, 1987 Stock Market Crash, 1989 Japanese bubble, 2001 Tech. Crash and last but no means least; 2008 the  sub-prime crisis. History is littered with booms, busts, crashes, recoveries, crazes, fads, delusions, gold rushes, great waves, etc., etc. 

If your financial goals were dependent on stock market performance at any of these times, under column one above, you were in serious trouble. Under column 2 you most likely did Ok.

Our goal is to work under column two. It's not sexy, but it's safe.