The need for financial protection against the risk of exhausting savings during a long retirement has become a core concern for many advisers. Aviva Investors look at potential solutions to this challenge
The coronavirus pandemic is a global healthcare crisis. It has also inflicted huge economic damage. In many countries, GDP has slumped, stock-market volatility has risen and central banks have slashed interest rates to record lows, which is supressing bond yields. This brings new challenges for those approaching retirement.
Andrew Scott, professor of economics at London Business School argues that people need to think more carefully about how they plan for a long retirement: it is not just about accumulating more savings, but also investing them wisely. Scott notes: "In a world where we have very low interest rates and very long lifespans, drawdown is a nightmare issue. People will be looking at their portfolios in very different ways. With current interest rates and the length of life you might be living, the old expectations about how much of your assets you might be able to draw down each year (which used to be around four per cent) will just not be sustainable. You might have to be much more active in managing your portfolio."
The current economic environment brings additional challenges. For investors to manage longevity effectively, their assets need to keep pace with inflation. Those that do so are typically higher growth assets, but that often comes with greater volatility. Volatility brings in sequencing risk (the risk that significant falls in asset prices early in retirement compromise an investor's ability to generate returns in the long term).
But there are ways to manage longevity risk through an investment portfolio as well.
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