How The Planner's Role When Navigating Retirement Needs To Evolve

A few years ago I wrote an article on this blog titled The Financial Planner's Role In Retirement Planning. It essentially laid out the role that financial planners play when helping individuals plan for retirement. Most of what I said in that article continues to remain true. But there have also been a number of pervasive changes in the ground realities within which today's individuals plan for retirement. Therefore it would only be fair to throw light on those changes. And that is what today's article is going to do.

A Realistic Understanding Of Risk, Volatility And Returns

Today's investors are a lot more aware of basic concepts such as asset allocation and product selection. And planners will continue to add value in these areas, like they have always done. But today's planners must also be adept at helping individuals develop realistic perceptions of risk, volatility and returns. Risk and volatility are often perceived to be synonymous and interchangeable. But there is a fundamental difference between the two. Risk when planning an individual's finances is essentially born from two sources :

1. Permanent loss of capital

2. Not having enough money for financial goals when they fall due

Volatility merely indicates the presence of risk. It cannot reliably measure risk. Academicians and theorists advertise volatility as a measure of risk. This is because volatility can easily be quantified using mathematical formulae. But risk is abstract in nature. And anything that is abstract cannot be quantified reliably. Therefore volatility is a symptom but not a measure of risk.

Today, pragmatically constructed financial plans in India would factor in long term post tax returns of approximately 9% from equity, 7% from tax exempt debt and 6% from taxable debt products. It would also be prudent to construct financial plans assuming post tax portfolio returns would match inflation over the lifetime of the individual. These numbers and assumptions may seem overly conservative and sobering. But they are realistic and would therefore insulate individuals from rude shocks due to market behaviour in the real world. More about the reasoning behind this can be understood in my earlier article Understanding Asset Classes And Their Returns The Right Way.

Ensuring An Appreciation For Sequence Risk

Sequence Of Returns Risk (SORR) or sequence risk has a material and pervasive impact on retirement planning. This is especially true during the distribution phase or post retirement period of an individual. Sequence risk simply means that we cannot predict the pattern in which returns would accrue over a period of time. Sequence risk is a critical factor during both the accumulation and distribution phases. But it becomes most crucial with regard to defining portfolio allocations and withdrawals post retirement. A prolonged sequence of negative returns is likely to significantly reduce portfolio longevity post retirement. 

This is where aspects such as regular portfolio rebalancing, derisking, maintaining optimal allocations to equity post retirement and sourcing withdrawals from less volatile avenues gains importance. But most individuals do not fully understand the impact that sequence risk can have on their portfolios. Planners must therefore educate their clients about the concept of sequence risk and its implications during both the accumulation and distribution phases. To understand more about these aspects have a look at my earlier articles Sequence Risk And Our Long Term Goals and Retirement Investing - II : Managing Withdrawals Post Retirement. 

Dealing With The Influence Of Artificial Intelligence 

Artificial Intelligence (AI) is a reality that all financial planners must contend with today. AI has the capacity to place a wealth of information at the fingertips of each individual. More importantly, it can analyse, summarise and present vast volumes of information in a structured manner. Given the right inputs under the appropriate models, it can even prepare a full fledged retirement plan. And all of this would just take minutes. This makes AI a worthy challenge for every financial planner. 

But existing variants of AI do not do as good a job of providing responses within a personal touch and real world context. This is something that today's financial planners can take advantage of. This implies that planners need to come up with more insightful and responsible answers than those offered by an AI model. They must be able to break down the insights and nuances behind each aspect of a retirement plan in a relatable manner. This is the only way that financial planners can give themselves an edge over AI in today's times. 

Summing Up

A planner's technical acumen and product recommendations do still have a role to play in the retirement planning process. But their role is no longer centred around these aspects . It has a lot more to do with their analytical and communication skills. Planners must be able to look beyond the technical aspects while understanding the nuances and implications behind them. They must be able to understand how each aspect of a retirement plan would impact the individual for whom it is prepared. Artificial Intelligence can definitely be of use to planners in this regard. But it is ultimately up to the planner to communicate the most realistic and relevant narratives behind the numbers. This must be done in a way that is understandable to the individual for the person whom the plan is being prepared. This is the most effective way for planners to remain of value while also benefiting from the presence of Artificial Intelligence