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Financial Planning
Retiree strategies need greater attention: Research

Traditional portfolio construction needs to change to provide for the needs of retiree clients, new research shows.

Fidelity International with the Financial Planning Association of Australia (FPA) and CoreData released a report Building Better Retirement Futures, which aims to equip advisers with solutions for retirees.

Fidelity International head of client solutions and retirement Richard Dinham said as the retiree client group grows it is essential advisers are equipped with the right tools.

"Financial planners are at the frontline of helping people make the most of their assets and achieve their best possible retirement," he said.

"However, the strategies that suited clients in accumulation phase may no longer work in retirement, and advisers will need to develop new approaches specifically designed for their needs."

Fidelity noted that not one single investment strategy is likely to suit all clients therefore advisers must be adaptable and offer different solutions.

"For instance, the paper outlines the different strategies that advisers can use with their retiree clients such as keeping the same strategy as in accumulation phase; transitioning to a more conservative asset allocation; simple bucketing; more complex bucketing; or income layering.  It then looks at the pros and cons of each approach," Dinham said.

For retirees keeping the same strategy, Fidelity said its effectiveness for many is highly debatable and comes at the cost of flexibility.

While transitioning to a more conservative asset allocation is easy for investors to understand but has its limitations.

"[...] if the downside is overly protected, the relatively constrained upside potential of the strategy may expose the retiree to greater longevity risk and inflation risk," the report said.

Simple bucketing such as a cash bucket and a diversified investment bucket has the advantage of "significant merit in its simplicity" and effectiveness in mitigating market volatility.

Complex bucketing follows the principle of dividing retirees' accumulated savings into discrete pools, each with different objectives and has a capital-certainty bucket to provide an additional layer of income support.

"However, a strength and a challenge of the complex bucketing approach lies in replenishing or refilling the cash and capital-certainty buckets over time," the report said.

An income layering strategy divides a retirement portfolio into separate components but bases those components on retirees' spending needs for life.

The report concluded that the strategy requires a close relationship between the adviser and the client with regular reviews to ensure the effectiveness of the strategy.

"Determining the best strategy, or combination of strategies, is a significant part of the value a planner brings to the table," Dinham said.

"Advisers that understand the types of risk specific to retirees, the fears and challenges they face in retirement, how their needs differ from accumulators, and the strengths and weaknesses of different retirement investment strategies, will be best placed to help their clients throughout their retirement."

Read more: Fidelity InternationalRichard DinhamBuilding Better Retirement FuturesFinancial Planning Association of Australia
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