Principles for investing in retirement

We all like to think that when our working life is over, everything will be sorted. The planning will have been done, leaving your clients to relax and enjoy their new life of leisure. If you have clients who are approaching retirement, it is a good idea to take some time with them to review and refine their strategy before they choose an appropriate solution for their needs.

Following the three key retirement principles outlined in this article may help them to make the best choice at this exciting time in their life.

ARF vs. Annuity

Traditionally when it came time to retire it was encouraged to make a definitive choice; use an Approved Retirement Fund (ARF) or an Annuity. But nowadays, retirement conversations can be a little more fluid.

At Zurich, we have found that in the early years of retirement there is an increased need for flexible retirement income which can be provided by an ARF. Zurich’s ARF allows your clients to invest all or part of their pension fund after they retire.

The client can decide on the type of fund they would like to invest in, and the amount of risk they’re comfortable with. With an ARF they can withdraw from their fund on a regular or ad hoc basis. Alternatively, in the latter years of retirement, there can be an increased need for a guaranteed retirement income and this can be provided by an Annuity. There are a number of choices when purchasing an Annuity and it is important to choose an Annuity that reflects their needs and the needs of their spouse in retirement.

Sequencing Risk

Your clients face plenty of risks when investing for retirement. Stock market volatility, rising inflation, unexpected expenses, or even the cost of healthcare. But there’s one retirement risk that gets very little attention: Sequencing risk.

Sequencing risk is the possibility that consistent withdrawals combined with market downturns in the early years of retirement could drastically shorten a portfolio’s lifespan. Once an investor retires and starts taking withdrawals from their investment portfolio, annual market returns become critically important.

Significant market losses in the early years of retirement can shorten the longevity of a portfolio (such as an ARF), even if better-than-average market returns occur in later years. This is the risk posed by the sequence of returns. Zurich manage this type of risk through placing risk into three ‘buckets’, each consisting of different asset classes, one for short-term obligations, one for medium-term spending needs and the third for succession and inheritance considerations. Each bucket is designed to meet specific time-based goals and this strategy aims to mitigate against sequencing risk by ensuring that your clients have access to cash or stable investments for near-term expenses.

Rebalancing

When your clients first start investing, they will set their objectives and decide on an asset allocation plan that will direct their purchases. Most investors opt for a multi-asset fund, where the asset allocation occurs within the one fund choice. However, if they do choose to select multiple funds, their portfolio may deviate from the asset allocation that were initially selected as the funds fluctuate in value. In this scenario, rebalancing is crucial for risk management and increased returns. To return a portfolio to its intended asset allocation, rebalancing consists of purchasing and selling funds on a periodic basis.

Regular reviews will ensure your clients are on track to achieve their long-term, strategic financial goals.

For more information on the Zurich range of post-retirement options talk to your Zurich Broker consultant or visit zurichbroker.ie