Faced with more choice than ever before when investing for retirement, more and more people will increasingly rely on advisers to help them plan their pension options.
Central to this is achieving a sustainable income for the whole of retirement. Yet many traditional financial planning tools fail to take into account factors which could have potentially devastating effects on a client's pension fund.
Pound cost ravaging could deplete pension funds beyond repair, lowering income levels and reducing the quality of life for those whose funds are affected.
That's why it's so important you and your clients understand its effects. By explaining pound cost ravaging simply and looking at how to avoid it, you can demonstrate the value of professional advice to your clients.
An expert's view on pound cost ravaging
Aviva spoke to Abraham Okusanya, principal at FinalytiQ, to understand how and why pound cost ravaging happens - and how to avoid it. Here are several of the aspects of pound cost ravaging Abraham examines in his report:
What is pound cost ravaging?
Pound cost ravaging is a combination of volatility drag and sequencing risk, compounded by regular withdrawals. It can deplete pension funds quicker than expected. Poor investment performance in the early years of retirement can quickly reduce the value of a pension fund.
If your clients continue taking the same level of income from the fund during this period, they may find their fund drains much quicker than anticipated. In such a situation, it may be very difficult - if not impossible - for their fund to recover.
For clients drawing down money from their pension funds in retirement, pound cost ravaging is a serious and often overlooked risk.
A look at what constitutes a 'safe' withdrawal rate. This considers the 4% rule and how you can personalise withdrawal rates to individual clients. It also discusses fixed percentage versus inflation-adjusted withdrawals and looks at the possibility of taking withdrawals from asset classes making the most of growth.
In this section, Abraham discusses how standard deterministic tools may not be sufficiently robust as they don't take into account pound cost ravaging. Because of this, these tools can risk misleading clients. He goes on to look at alternative modelling tools, which can provide a wider range of outcomes, focusing on probability rather than certainty.
Taking a look at stochastic modelling tools. Regular planning meetings with clients aren't enough to help keep them on track in retirement, you also need the right tools for the job. Abraham looks at how stochastic modelling tools can take pound cost ravaging into account better than deterministic tools.
Download Abraham's pound cost ravaging paper
If you want to find out more about pound cost ravaging, download Abraham's white paper Pound Cost Ravaging: Understanding Volatility Drag, Sequencing Risk and Safe Withdrawal Strategy In Retirement Portfolios now.
Help your clients understand pound cost ravaging
To help you showcase the value of financial advice to your clients, Aviva has created a free client guide which explains how to consider and help avoid the pitfalls of pound cost ravaging when looking at income drawdown. The guide outlines clearly and simply how pound cost ravaging could affect your clients' pension fund. It tells your clients about the seven areas you will look at when advising them.
Download your copy now to help your clients more readily understand this complicated subject.