Drawdown is a “nightmare” and how much of your assets you can draw down each year is no longer sustainable. What is the answer to the longevity puzzle? Aviva Investors investigates.
Andrew Scott, professor of economics at London Business School argues that people need to think more carefully about how they plan for a long retirement: it is not just about accumulating more savings, but also investing them wisely. Scott notes: "In a world where we have very low interest rates and very long lifespans, drawdown is a nightmare issue. People will be looking at their portfolios in very different ways. With current interest rates and the length of life you might be living, the old expectations about how much of your assets you might be able to draw down each year (which used to be around four per cent) will just not be sustainable. You might have to be much more active in managing your portfolio."
The current economic environment brings additional challenges. For investors to manage longevity effectively, their assets need to keep pace with inflation. Those that do so are typically higher growth assets, but that often comes with greater volatility. Volatility brings in sequencing risk (the risk that significant falls in asset prices early in retirement compromise an investor's ability to generate returns in the long term).
But there are ways to manage longevity risk through an investment portfolio as well.
Click here for our exclusive spotlight on multi-asset, and how dynamic portfolio management combined with ESG metrics can help clients to overcome longevity risk and achieve their retirement goals in 2021.