Decumulation Advice - What does your firm do?
Hi everyone,
I've been tasked with reviewing our process on decumulation/sustainability, and was wondering what everyone else does.
Effectively, we need to establish whether the withdrawal rate on a portfolio is sustainable.
Some of the options I've come across are below.
- Cashflow Modelling
- Monte Carlo
- Safe Withdrawal Rate
I would be interested to know what people do, and which providers/systems they use?
Personally, I like the idea of cashflow modelling, but it does have its flaws. The returns are always in a straight-line, and don't account for the volatility expected over retirement. I know you can run alternative scenarios, but clients typically pay most attention to the base plan.
Comments
Hi,
'Safe' withdrawal rate is to be avoided at all costs. There is nothing inherently 'safe' about it, and your earlier use of the word sustainable is much preferred.
Monte Carlo can be bolted into a cashflow model. It's a model that will run hundred or thousands of outputs based on changes to each variable, which at the end gives you probabilities of outcomes e.g. 'based on 1,000 different scenarios modelled using historic variables, taking £1,000 each month from your pension fund invested in the Amazing Growth Fund is sustainable in 9 out of 10 scenarios until you are 92 years old.'
Returns that are straight line are called deterministic. You can use a deterministic rate that is based on the expected return of your portfolio e.g. 6% p.a. from a 70% equity portfolio, with a specified 'event' at fixed or varied periods into the future. At these event markers, the returns deviate from the standard 6%. e.g. every 12 years you run an event where the portfolio falls by 20%, then falls by 5%, then has two years of 15% returns before settling back into 6%.
Or, you can simply take away a fixed amount of capital at the start of the decumulation period e.g. at the first withdrawal point you also add an unrecovered loss of 35% of all invested capital.
The main flaw with cashflow is that it is always wrong. But it is still better to have it than not to.
I would argue that clients pay attention to what is highlighted to them. And if that's the base plan, then I'd suggest making the base plan what you are recommending, with the 'what-if' options showing how it goes wrong if they do things differently.
You can't assess the sustainability of an invested fund's withdrawal rate over time without either a straight line or Monte Carlo simulation. It doesn't need to be a full cashflow, you could simply run that fund value through excel - but you must introduce multiple assumptions that in real life will vary in ways you cannot predict. And we will never be correct when judged in hindsight.
Systems I use are Voyant and Excel. There are some other good cashflow systems out there, I've heard anecdotally but not reviewed the market for several years as Voyant is better than everything else and used by almost all my clients. It costs a fair bit but I get huge value from it.
I use ONS data for assumptions about life expectancy, inflation, house prices. I take investment assumptions from the MPS providers or some asset managers will provider returns matrices. Care fees data you can get great local data from lottie.org. School fees from the ISC (although if you are school fee planning you should just go directly to the school the client is going to use because there are many extra fees that don't get swept up in the headline numbers).
Perhaps it needs a separate thread, but it ties into this post somewhat so will post it here for now.
Is anyone aware of any other "lifetime annuity within drawdown" products on the market at the moment?
I know Canada Life had one but it's closed to new business.
I am aware of the following:
1) Standard Life Annuity within the Fidelity Drawdown
2) Just Annuity within a 7IM or Wealthtime plan
Are there any others that are available currently?
Has anyone been made aware of any other providers looking to enter this space?
It's all being sold on the grounds of decumulation advice and diversifying income streams.
I have had conversations with a couple of other providers about this but I don't know if it is public so I won't name them.
My view is that these are reinventions of the same products we've had going right back to Canada Life's Annuity Growth Account in 1996ish. Just, LV=, MET Life, MGM, AXA, Aegon, Pru - they've all had something like this in the last 20 years.
They never sell enough to make them commercially viable, they get pulled after a year or two, then those clients who have them create a headache for advisers and paraplanners in 15 years time. The client doesn't know what they bought, paraplanners don't know what they are, and there isn't anyone left in the firms that sold them to explain them properly. Also, they tend to cost a lot and reduce flexibility.
Thanks Benjamin, that's incredibly helpful.
We do use Voyant and I really like it, but creating a plan for every single client is quite time consuming, so an alternative for simpler cases would be handy.
I must admit that I'm quite impressed by the https://www.mandg.com/pru/tools-calculators/pru-retirement-modeller/index.html, a very useful tool.