financial advice, Retirement

Categorising clients can cut sequencing risk

Sequencing risk

Knowing how to categorise retiree clients can significantly assist advisers in implementing strategies for them to diminish sequencing risk.

A leading actuary has recommended advisers need to categorise clients using their retirement objectives to effectively manage any exposure to sequencing risk.

Accurium principal Melanie Dunn noted there are three cohorts clients in their retirement will fit into, the first being those who want to continue to grow their savings once they’ve stopped working. The second is made up of individuals looking to preserve their capital and fund their retirement years purely on the income generated from that capital, with the third being people who want to spend their entire superannuation balance.

Dunn pointed out preservers and spenders are exposed to sequencing risk the most and acknowledged some common characteristics that could help practitioners identify clients who could belong to each of these groups.

“Who are preservers? They’re retirees who might have a large amount of savings relative to the lifestyles they want to have,” she noted.

“We also find preservers are people who have a desire to pass on the majority of their wealth as a bequest or people who might actually like to be spenders but are worried about running out of money.

“So preservers live off the income from the portfolio, they spend their earnings and their capital gains [so] they are exposed to significant market downturns.

“Our spenders are retirees who aren’t necessarily concerned with leading a bequest, but they’re not necessarily just people who want to spend all the kids’ inheritance. They’re only wanting to utilise some of their retirement savings to improve their lifestyle in retirement versus just being a preserver and living off the income [from their investments].

“They’re also people who simply can’t afford to be preservers due to a lower level of savings [and] they need to spend some of their capital to afford their desired lifestyle in their retirement.”

According to Dunn, once advisers have identified how to categorise their retiree clients, they can then formulate and implement an appropriate strategy to mitigate sequencing risk.

Accurium research performed in 2018 found around 30 per cent of retiree couples were preservers and nearly 50 per cent were spenders.

Copyright © SMS Magazine 2024

ABN 43 564 725 109

Benchmark Media

Site design Red Cloud Digital