The sudden drop in investment markets at the start of August was a shock to many, especially as we had seen steady market growth since the start of 2024.
While there was a quick recovery over the days that followed, it was a stark reminder that market volatility is persistent. The need to manage its effects remains critical, particularly for those closer to retirement, and the years that follow.
The importance of having a well thought out strategy that can navigate the inevitable ups and downs of the market, especially in the crucial years leading up to and during retirement, is imperative.
For those in the retirement risk zone (the five to 10 years up to, and after, retirement), periods of volatility can be particularly stressful.
Risk tolerance tends to be lower during this time, and any major changes in markets could alter how individuals view risk and how they feel about being invested in markets.
For example, if equity markets drop suddenly, someone invested in a standard fund might try to recoup losses before taking an income if they can afford to wait. If they cannot, the alternative might be locking in losses from the decline, which could significantly impact their retirement plans.
Income, investment, and the road to and through retirement
Having a de-risking plan in place as people head towards retirement may make sense for some. For others though, remaining invested throughout their retirement is a better strategy. In these circumstances, advisers need to carefully consider how they can help reduce their clients’ level of investment risk while still benefiting from drawdown flexibility.
Regulatory changes are also reshaping how advisers assist their clients in retirement planning. The Financial Conduct Authority’s consumer duty has raised the bar even higher, mandating that firms must deliver good outcomes for consumers.
In addition, the FCA’s retirement income advice review recommends that advisers establish robust processes for clients in and approaching decumulation, ensuring that retirement plans are both sustainable and suited to the client’s evolving needs.
This includes assessing a client’s risk tolerance and capacity for loss, as well as understanding their income needs throughout retirement. With these regulatory changes in mind, advisers are increasingly looking for investment solutions that not only align with these new standards but also offer clients the flexibility and security they need during retirement.
In this regulatory environment, advisers must plan according to a client’s risk tolerance, desire for growth, income needs, and flexibility requirements.
Smoothed funds should be an important consideration in this context, as they offer a multi-asset solution that can be tailored to various stages of a client’s retirement journey.
By incorporating smoothed funds into a broader strategy, advisers can help their clients navigate the complexities of retirement planning in a way that is compliant with regulatory expectations while also helping them to meet their financial goals.
