Risks and Investment Strategies

Question 1

Longevity Risk

Answer 1

The risk that someone may live longer than anticipated

As a result they might -

Outlive their retirement savings OR
underspend, leading to a lower income during retirement

Question 2

Safe Withdrawal Rate

Answer 2

The amount of money, expressed as a percentage of the initial investment which can be withdrawn each year for a given quantity of time including adjustments for inflation, which will not lead to portfolio failure.

Portfolio failure being defined as a 95% probability of depletion to zero at any given time within the specified period.

Question 3

Sequencing Risk

Answer 3

Sequence risk is also called sequence-of-returns risk. It becomes a danger as an individual takes withdrawals from a fund’s underlying investments. The order or the sequence of annual investment returns is a primary concern for retirees who are living off the income and capital of their investments.

Question 4

Strategies to reduce sequencing risk

Answer 4

Specialist Portfolio

Reduce Spending , particularly in market downturns

Cash Reserve which provides first few years income

Rising Equity Glide Path which drip feeds funds into equities

Question 5

Cash Flow Forecasting - Hasn’t been tested for a while

Answer 5

Not about things changing more about things going wrong!

Stress Test -

Investment returns lower than forecast 
Living longer than expected 
Inflation higher than forecast 
Large ad-hoc withdrawal 
Need to increase income 
Permanent loss of asset