Fortunately, there are ways that advisers can help protect their clients from this type of scenario.
For Mr Lowe, having enough to pay for basic living costs should take priority and knowing how much should be set aside for these will have been established prior to investing for accumulation.
“One good option for retirees is to work out how much of their income is needed to pay their basic costs of living – utility bills, food and transport – and how much is discretionary spending on items such as holidays, eating out and gifts,” he says.
“Ideally, the secure income generated by the state pension, defined benefit pensions and annuities should be sufficient to cover the basic costs, leaving the investments to cover discretionary spending which can be cut back in times of poor performance.”
Building blocks
How much does the investment strategy have to change in decumulation?
Pete Glancy, Head of Policy at Scottish Widows says: “There are two basic building blocks in decumulation: an annuity which gives certainty, and income drawdown which gives flexibility and a potential inheritance.
"In reality most people want a bit of both. But the way in which the two are best mixed depends very much on the retirement journey of each individual customer, which can change quite frequently as people’s circumstances and priorities change over time."
The need for advice does not stop suddenly once a client is in decumulation.
“For customers to make the most of these building blocks they will need ongoing help and support," he acknowledges. "Providers and advisers need to work together to make this frictionless and intuitive."
As Kevin Doran, chief investment officer at AJ Bell Investments observes, it is common to assume when in decumulation the investment horizon is likely to be shorter than for those clients in the accumulation phase.
“But with life expectancy in the UK close to 84 for men aged 65, and over 86 for women, the time horizon for someone who is new to drawdown is still one that has to be thought of as potentially a long-term, 20-year journey – maybe even longer,” he asserts.
“This means investors should be building inflation protection into their portfolios.”
Mr Patterson points out one of the pitfalls in decumulation: “Someone who enjoys strong growth in the early years of retirement will do much better in the longer term than someone who suffers negative returns in the early years, even if the average return over the first five or 10 years is exactly the same in both cases.
