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Nick Lincoln: Retirement Is Riskier Than Ever. Here’s How I Help My Clients Through It.

By Nick Lincoln, founder of Values to Vision Planning.

Getting clients to grasp that inflation is the real risk to a successful retirement (one where the people outlive the money) is key.

In 2018 the Department of Work and Pensions published research showing the average age of the UK male retiree is 65. For women it’s 64.

According to Abraham Okusanya, boffin behind the Timeline app,  a UK male has a 50/50 chance of living to 88. For females, given the same odds, the age is 91. Put the happy couple together and – by some alchemy beyond my comprehension – one of them has a one-in-two chance of living to 94.

So Mr and Mrs John and Jane Doe – your archetypal average UK retirees – will face a 30-year retirement. For those that struggle with long numbers, that’s three decades.

And Mr Okusanya’s work indicates that there’s a 10% chance that one or other of Mr and Mrs Doe will live to 102. Now we’re talking about a near-four decade retirement. Many IFA clients will be in that 10%. Many of our clients will have to fund not 30 years of lifestyle retirement costs, but 40 – or more.

To be quite clear: a significant number of our clients are going to spend more time decumulating than accumulating. Read that again. Chew it over. Think about what that means.

That’s marker in the sand number one: getting clients to realise how long they will live in retirement.

Marker in the sand number two? How inflation compounds over long periods of time. Say, for example, over 40 years or so.

Over the 40 years to May 2019, UK Retail Price Inflation has come in at an annualised 4.25%. Let’s trim that back to 4%. Let’s assume Mr and Mrs Doe, 65 and 64 respectively, have all-in Lifestyle Retirement costs of £40,000 per annum. At 40-year trendline UK inflation, the annual cost of their Lifestyle becomes

  • £59,210 after 10 years;
  • £87,645 after 20 years;
  • £129,736 after 30 years;
  • £170,724 at age 102 (the 10% brigade).

So an average retirement of around three decades shows Lifestyle costs increasing more than three times. For the “10 Percenters” it’s a four-fold-plus increase.

Just sitting here, typing this out, has me exhausted and suffering from number fatigue. Can you imagine the state of mind of Mr and Mrs Petrified sitting in front of you? You lost them at or around “Department of Work and Pensions”.

Show some mercy. Show them graphs. Everyone gets graphs.

a voyant chart

Graphs and pictures always capture attention. Which is good, as many people – bright people – struggle with numbers. And when you are trying to engage a couple to consider their retirement income planning, the more engagement you engender, the better the buy-in.

Nothing more vexes the minds of our clients than trying (and failing) to see themselves at some future point, years and decades down the line. I don’t know what I’m doing next week: getting clients to visualise where they will be in, say, 20 years is a skill I don’t possess. Nor, I would suggest, do most other advisers.

But graphs and pictures can move clients to see their future selves, at least in financial terms.

The Cash Flow graph shows clients the compounding effect of inflation over time. I hover over the graph at 10-year intervals, picking out the incremental rising cost of their Lifestyle. This way clients can both see the numbers and feel them (via the graph). I prefer the Cash Flow graph over the Expenses graph, as the former shows outgoings in red.

Red is danger. And I want clients to see the danger.

This approach has made a material difference in my interaction with clients. Getting the longevity and inflation conversation out there – and getting clients to understand it – as soon as possible is absolutely essential. This graph does this.

For the first time in their lives, our clients see what the real risk is to their retirement. That a three-decade plus Tsunami of rising prices is coming their way and will wipe out the purchasing power of whatever pots of wealth they’ve accreted to date.

Once this is done you can swiftly move on to the rest of your Voyant presentation. No need to waste too much precious time on the hoariest canard of them all (investment “risk”), or in explaining that stock market volatility is not only expected but desirable.

Instead, simply close the meeting with another honesty bomb: “Without the volatility Mr and Mrs Client, you will not get the commensurate return premium compensation. And without that, you will as surely run out of money (purchasing power) later on as we have run of time today. I look forward to meeting again in two weeks time to implement the only strategy that I can see will save you. Until then – safe journey home.”

Nick Lincoln
Photo courtesy of Nick Lincoln

Nick Lincoln is an IFA and the founder of Values To Vision Planning Ltd. Listen to his latest podcast episode further discussing inflation risk and retirement.

The views expressed in this article are that of this author and do not necessarily reflect the views and opinions of Voyant.