In the accumulation phase, it makes perfect sense for clients to invest heavily in riskier assets. If the market falls, then it's likely they can adjust their retirement plans to give their funds time to recover.

At the point of retirement, the stakes are much higher. People have built up savings over many years and a market fall close to, or in the early stages of retirement, can be devastating

As well as sequencing risk, there are other points to bear in mind when advising clients about their investment strategy at retirement. For example:

  • Risk aversion. There is evidence that people become more risk averse in retirement. There are a number of reasons for this.

    They no longer have the cushion of a regular salary each month. The effort required to acquire capital also has a bearing - we may squander a lottery win, but are far more circumspect with savings built up over many years. What’s more, many people simply become more anxious and fearful with age.  

  • Capacity for loss. Allied to this, people are often very concerned at the prospect of their standard of living in retirement being eroded if markets fall significantly.

    Identifying a client’s capacity for loss in retirement and taking action to secure and protect the expenditure they consider essential, can make it easier for clients to invest in higher risk assets with the balance.

  • Behavioural economics. There are a number of irrational biases that can colour the perspective people hold about investment risk.

    Probability mismanagement can make them too sensitive to stock market volatility. Familiarisation bias can lead to a flawed perception of the risks associated with UK stocks while herding can lead to poor decisions on timing markets.