What can advisors do as their clients live longer, many without pensions?
The risks to manage in decumulation
Previous generations of retirees tended to have greater access to defined benefit (DB) pension plans. Those plans, Febbraro explained, offered guaranteed lifetime income and professional investment management. For the roughly 7 million Canadians who still have access to DB plans according to StatCan, longevity risk is not as much of a factor. Those Canadians have fewer decumulation decisions to make, because they know they’ll receive consistent retirement income that rises with inflation.
Those Canadians without DB plans have far more decisions to make, even if they’ve done a good job building wealth over time. Febbraro believes that advisors play an essential role here, as the industry shifts into managing the complexities of decumulation. Those advisors need to make their clients aware of five areas of risk: longevity risk, market risk, sequence of returns risk, inflation risk, and behavioural risk.
Longevity risk, Febbraro explains, amounts to the chance a retiree outlives their savings. Market risk represents a prolonged period of poor returns. Sequence of returns risk is related, but comes when those market downturns are poorly timed with key moments in retirement. Inflation risk is perennial, but elevated in recent years as the cost of living rises. Finally, there’s behavioural risk which can plague retirees who either become too conservative in retirement or react emotionally during periods of market volatility. Advisors have to manage all those risks as they help clients decumulate.
Solutions for income, stability, confidence
Febbraro says that his team’s focus at Canada Life is in providing solutions that offer three features: sustainable income, reduced volatility, and increased confidence. He cites the example of his firm’s Risk Managed Portfolios, which seek upside capture on capital markets but use a host of risk management techniques like the sale of covered call options to provide monthly distributions and offset market volatility.
There are also a host of older solutions that still provide value for retirees. Annuities, Febbraro notes, can help address longevity risk and provide predictable income, but they work best in tandem with other tools and solutions that retain exposure to market growth or offer liquidity that can safeguard against the unexpected.
