In the final instalment in the life phases cash flow clinic, Steph Willcox, head actuary, Dynamic Planner takes a look at the final phase clients may plan for. These clients are retired and used to withdrawing from their savings to fund their lifestyle.
Clients in late retirement are likely to have been receiving financial advice for a while and are now looking to reassure themselves that they can afford their current lifestyle for the remainder of their life. They may have concerns about leaving money for children or grandchildren or worries about care home costs. If you are advising joint clients, then it will also be important to ensure that lifestyles can be maintained even if one client requires additional care or passes away.
What should you focus on?
As clients age, we know that their attitude to risk can decrease. It is therefore important to ensure that you are using the same measure of attitude to risk throughout their lifetime so you can track this decrease in risk tolerance and adapt investment strategies accordingly.
Increasingly, rather than abiding by a client’s attitude to risk, the investment strategy adopted will be limited by a client’s capacity for loss, as the potential time for recovery gets continuously smaller and the pot that withdrawals are being taken from also reduces in size. Modelling the potential losses that a client may suffer will be important as these short-term losses increase in importance as the time horizon of investments shorten, and so ensuring your cash flow software can model inflows and outgoings on a monthly basis will be important to replicate how money will flow in reality.
As clients age their state of health may also change quickly, and it will be important to investigate alternative income strategies in retirement based on this change of health. Guaranteed income quotes will be greatly affected by a change in health, particularly if insurance companies are then able to quote enhanced terms or impaired life annuities where clients may receive much more favorable annuity rates when compared to a standard annuity rate.
It may be helpful to show clients different scenarios to reflect these changing prices and to help the clients make the best decision for them at the right time.
If clients are making decisions about their finances that are irreversible it will be important to check if they are a vulnerable client, and if they are able to make this type of decision. Although age does not make a client vulnerable, it can of course bring health or life events that could affect a client’s level of vulnerability and affect their ability to make decisions.
If you are using a cash flow plan you will also be able address another high priority for most clients – the ability to leave assets to dependents as inheritance. As clients age, we can provide a little more certainty over the level of assets that are likely to be available to pass on. Ensuring a certain level of assets for legacy purposes can be demonstrated using your cash flow software, and the impact of this inheritance occurring at different times can also be shown.
Finally, clients may be concerned with the cost of care in their later years. You can demonstrate the impact of these care costs on a cash flow plan, either through the income already planned to be received, or through the sale or part sale of a property. Modelling these incomes and expenditures can provide real reassurance that your clients will be able to afford care, should they need it, without sacrificing more than they want to.
What is less important
As with all retirement phases, protection policies will continue to decrease in importance as clients age.
In summary
Late retirement can bring challenges with mental and physical health decline, and ensuring that you treat all customers fairly, and ensure good outcomes for all clients is of vital importance.
Assessing a client for vulnerability characteristics before making decisions is important, and ensuring they understand the choices they are making even more so.
By using cash flow planning tools, you can bring client’s finances to life, and show them exactly what they should expect of their finances over their lifetime.
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