Pension reform in the United Kingdom has given individuals more access to their retirement money. As a result, post-retirement risk has also been shifted to the individual. This development is providing financial service professionals the opportunity to create new retirement planning models.
Using a bucket approach to discuss expected spending requirements throughout retirement can make it easier for individuals to understand their needs, their varying attitudes toward risk, and the necessary trade-offs. This approach can also be used by advisers to build a bespoke portfolio solution for a client…
The bucketing approach can be thought of as a ‘bottom up’ approach to determining the retirement solution, which is intuitive and easy to explain to clients. In addition, sophisticated modelling tools are available which an adviser can use to validate and/or fine-tune the overall asset allocation within and between buckets – that is, taking a ‘top down’ or diversified portfolio level approach.
Benefits of the framework
The framework can be used by advisers as part of the retirement planning process, and can be tailored to individual circumstances, taking into account both financial and emotional needs. It meets the three previously identified benefits, namely:
• Simplifying a complex retirement into a structured approach,
• Ensuring that an appropriate level of risk is taken for each prioritised retirement need, and that the overall level of risk for the portfolio is appropriate for the individual, and
• By segmenting into buckets, and thereby providing a higher level of certainty in the short to medium term, it provides individuals with peace of mind and helps to avoid the potential for overreaction to market shocks.