Before the current pandemic hit, we undertook research into the retirement trends of consumers, asking questions around how and when people would like to retire as well as what their main retirement concerns were.
Perhaps unsurprisingly, the overwhelming concern for three in five (60%) was running out of money. Not being able to enjoy the lifestyle they want, as well as worries around health, were also major concerns.
In addition, we learnt that the average age people would like to retire was 63, while the age they expected to actually retire was 65. Only a third (33%) said they had planned to stop work completely when they retire, with the majority (59%) looking to work either part-time or ramp-up to retirement in phases.
But for many, even these modest plans will have been derailed by the coronavirus pandemic.
In such an unpredictable crisis, it is easy to be distracted by the market volatility over the past few months and fixate only on the short term. In fear of taking a hit to their hard-earned savings, many may have made knee-jerk reactions that could see them selling out of the market at its lowest point.
Not only will this ultimately ravage their pension pots, but it will make it impossible for them to gain from the subsequent market rally which would go some way to recover losses. As we know, it is a dangerous game trying to time the markets.
Our research shows that since the Woodford investment collapse, two in five (41%) of those with investments say their trust in investments has changed. The latest market turmoil is more than likely to have eroded this trust further.
Even those who sought financial advice could see their retirement plans disrupted. The crisis has inevitably impacted more on those closest to retirement and could see some making changes to retirement plans, through either working longer or income drawdown compromises. Yet I am surprised that recent research from Schroders found that as many as half of advisers had seen clients defer their retirement as a result of income losses triggered by the coronavirus pandemic.
While some impact to retirement savings is to be expected, if people have received robust financial advice, we would not expect to see a drastic derailing. Pension savings are a long-term investment, and the important thing is to not make any panicked, rash decisions without talking to an adviser.
As advisers, it is our responsibility to constantly remind clients about the long-term picture and make sure that they know we understand their aspirations and objectives. We are the ones to put in place the best strategy to preserve these, whatever situation may arise.
This means modelling with the client what would happen to their money in the event of a recession or big market fall, not only to put robust plans in place in order to be able to weather such eventualities – but vitally – to ensure that clients don’t panic should such a scenario arise.
While we could not predict that it would come as the result of a global pandemic, we have always been in regular conversations with our clients about the market cycle and what may happen were we to see a 20% to 30% fall in asset prices. We question clients on how they would feel were this to happen and whether they would panic and want to sell their investments.
Having these tough conversations is crucial in being able to put the proper protection measures for each client in place. This means building up the adequate levels of cash reserves – particularly as you get closer to retirement dates – to protect clients’ long-term goals.
For advisers that have done so, aside from providing the necessary reassurances to clients who need it, it should have been business as usual for the past few months.
The most important thing to avoid is clients either being forced to withdraw from their investments – be that a pension or other savings vehicle – or panicking and exiting themselves. This not only increases the drawdown risk but also increases the risk of clients running out of money before they die.
This will have the biggest impact on whether clients will have to derail their retirement plans – and it will likely come thanks to advisers who have not had robust conversations around investment risk in the necessary level of detail. Or it could have been from not carrying out the necessary cash flow modelling with clients to simulate the effects of potential market crashes.
But for those who have had good quality advice, and who had been prepared to face such a market downturn, we would not expect their plans to change drastically.
Jamie Smith is partner at Foster Denovo