Creating and documenting a client withdrawal profile
Withdrawal profile is the term used in the FCA Retirement Outcomes Review to summarise the decumulation requirements of a non-advised client. The same approach can be adopted for an advised client.
What is a withdrawal profile?
At its simplest, the key elements of a withdrawal profile could be summarised by three questions:
- What is your pot size (how much have you got)?
- What is your withdrawal rate (how much do you need)?
- What is your time horizon (how long have you got)?
Pot size is easy to measure, but should incorporate all sources of investments that are included for withdrawals to fund a retirement income (e.g. Sipps, Isas, guaranteed investment accounts).
Withdrawal rate this measure of income required from investments and should be after including income from state pension and any other sources.
Time horizon is key to retirement planning. Investing for retirement requires an estimate around life expectancy in order to select the appropriate time. While this should be tailored on a client by client basis, using Office for National Statistics data is a robust starting point.
Incorporating withdrawal profiles into the planning process
For a retirement CIP, a withdrawal profile needs further definition. A retirement income plan, together with a statement around capacity for loss and single or multiple withdrawal rates for those single or multiple income objectives constitute a withdrawal profile.
First, we look at each of the components of a withdrawal profile in turn:
1. Making a retirement income plan
Advisers may want to use multiple withdrawal rates to match different client needs: for example, one withdrawal rate for a “medium-term” bucket for the next 10 years, and a different withdrawal rate for a long-term bucket for the subsequent 15 years. While advisers may use cash flow planning tools to map out future spending plans and milestones, selecting the right withdrawal rate for different stages of the retirement plan is key to ensuring good client outcomes.
2. What is capacity for loss?
For clients in accumulation, a focus on risk profile is appropriate with due regard to attitude to risk. For clients in decumulation, a focus on the withdrawal profile is appropriate with due regard to capacity for loss. Assessing suitability means considering the risk a client is willing and able to take with their investments. Whereas attitude to risk is a measure of emotional willingness, capacity for loss is a measure of economic capacity. Attitude to risk is measured by perceptions around risk and return. Capacity for loss is measured by economic values such as age, wealth levels, and future withdrawal requirements. Attitude to risk is more important in accumulation. Capacity for loss is more important in decumulation.
3. What is a withdrawal rate?
While adopting a “4 per cent rule” is a helpful rule of thumb, it is a simplistic approach based on financial adviser William Bengen’s famous paper that was itself based on a set of assumptions modelling the retirement needs of an average US saver in the early 1990s invested in a 50/50 US equity/US bond portfolio, based on average US life expectancy. If that describes your client, then read no further. Mr Bengen’s conceptual and mathematical framework are helpful, but the assumptions are not. For each client, advisers need to answer three questions to determine the right withdrawal rate:
