Australians spend their working lives saving for retirement, yet most retirees live in fear that they'll run out of money. Financial planner Claudia Rigoni-Brazzale sees it first-hand in her practice, Rigale Financial Solutions.
"It's something I see a lot," she says. "When clients are in retirement, they aren't spending the money they have – they're too worried about losing it. They worry when markets have had a correction. Yet so many of them have more than a million dollars."
The unique mindset of retirees is underappreciated in an industry focused on maximising investment returns for those still in accumulation mode. However, research has shown retirees feel the pain of losses up to 10 times more strongly than younger investors – a point Rigoni-Brazzale explains to her clients.
"They know that, but they don't know we know that. They're not as worried about returns as they are worried about preservation of their funds," she says.
That intuitive feeling of loss aversion has its basis in fact: retirees are more prone to sequencing risk. Any market losses are strongly compounded because they are drawing down their assets while they have less time to recover than younger investors.
Rigoni-Brazzale has previously used pre-mixed funds that used active management and diversification to manage downside risk. It produced solid results through the COVID-19 market downturn of early-2020 and helped her reassure clients.
However, she recently started investing clients in the Milliman SmartShield range of separately managed accounts, which were launched in early-2020.
SmartShield adds another layer of downside protection by dynamically applying futures to its Moderate, Balanced, Growth and High Growth portfolios.
"It gives me and my clients some peace knowing we will have a less volatile journey and less downside," she says. "Clients want to know that there's some method and why we have chosen certain investments. If we can articulate it, then they get it."
The monthly market monitor, helps Rigoni-Brazzale to explain how it works to her clients. For example, the most recent update showed how controlling the level of market volatility and reducing the impact of long market downturns can help retirees' money last longer.
Sustainable withdrawal rates, Q2 2021
Rigoni-Brazzale prefers to use the SmartShield Balanced fund because it provides an all-in-one solution for her clients.
Despite the addition of explicit downside protection, the SmartShield Balanced managed account charges overall fees about half the level of the previous Balanced fund that Rigoni-Brazzale used.
"It's cheaper because they use underlying index funds like BlackRock and Vanguard. If I've got clients with smaller balances, those lower fees are important for them, while some clients specifically want index funds because they hear a lot about them from investors like Warren Buffett."
Fees and returns remain strongly in the spotlight thanks to new regulations and media coverage. While still important, it's a debate not structured specifically for retirees, who must also manage the greater risk that comes when their balances reach their peak and they begin drawing down.
Milliman provides another way for Rigoni-Brazzale to help her clients tackle the underlying fear they have about running out of money or being struck down by a market downturn.
"They often want reassurance," she says. "They'll ring me and say, 'can I do this?' and I'll say 'absolutely – you can afford to do that.'"
You can check the potential benefits of downside protection on your own client portfolios by using Milliman's SmartShield digital portfolio simulator at: https://advice.milliman.com/en/insight/The-SmartShield-digital-portfolio-simulator.
For more information about Milliman’s SmartShield Managed Accounts, please email [email protected].