Real-world decumulation forecasting is more important than ever in the current environment
Oct 27, 2022 1:23:36 PM
The market turmoil experienced over recent weeks, on top of the cost-of-living crisis and existing inflationary pressures on client portfolios, illustrate the complexity of predicting economic events when striving to deliver sustainable income levels and proving the importance of using real-world scenarios when creating financial retirement plans.
The ongoing volatility in gilt prices, equities and the value of sterling following the initial announcement of the UK government’s new economic plan, which also led to the subsequent series of resignations and policy reversals, culminating in the announcement that Rishi Sunak is now the UK’s third PM in as many months, shows how quickly the economic and political outlook can change.
And, while those still accumulating wealth will hopefully be able to weather this storm, people at or in retirement will find it more difficult to recoup significant losses.
Many things still need to be discovered about the current situation. For example, what is the likely impact of tax cuts and fuel subsidies on inflation? How high will the Bank of England need to push interest rates? What effect will this have on the property market? Could there be further policy U-turns around the corner?
All this uncertainty adds to the difficulty of delivering suitable retirement income advice and ensuring that clients receive a sustainable income later in life. Therefore, advisers need strategies and tools to support clients to achieve better outcomes by fully understanding their capacity for loss and downside risk and so aim to secure their desired lifestyle in retirement.
The need for real-world forecasting
By running through thousands of calculations and using real-world economic scenarios and different estimates of future economic conditions, our stochastic model has been proven to provide realistic, robust forecasts that helped advisers and their clients make well-informed and sensible investment choices through the Global Financial Crisis, Brexit referendum aftermath and Covid pandemic. The current environment again demonstrates the importance of using these real-world economic scenarios to support the delivery of suitable advice around decumulation.